Macro Digest : Why October 14th 2016 is KEY DATE

This is VERY important to know and understand – there are 2.7 trillion US$ in money market fund in the US. In the past these were mainly going to “Prime funds” which invested in short-term government and commercial papers. Then came Lehman and hell broke loos

These funds have in history guaranteed 1$ NAV always – but under Lehman it “broke the buck”….and we had liquidity crisis and a non-existent Commerciall Paper market – now in order to avoid same thing to happen the SEC per October 14th will allow PRIME FUNDS to trade only to its NAV – (making it significantly more risky….)

This has means 500 billion US$ has left “prime funds” and gone to Government funds, which as the name says can only buy government short-term papers – this has then created excess demand for T-bills and left LIBOR bid, because of course, the main difference btw prime fund and government is CP papers – mainly banks and mortgage issuers – ie. 500 Bln USD is “missing” in short-term funding.


Hence LIBOR bid…..a further 500 bln. USD is expected to leave before October 14th according to Morningstar.

Of course everything may go smoothly, but with a Fed wanting to hike you need to understand this “indirect” increase in not only the price of money but also the il-liquidity risk.

Below article from MACRO-OP on this theme, an attachment from Vanguard Prime Fund, the world biggest Primefund and finally some charts to support/follow the flow.

liquidity crisis


JPY 1 year Basis Currency Swap (how much you will pay more for the USD relative to JPY)

currency swap


Total Prime Funds AUM – 1st time in 17 years below 1 trillion USD!

prime funds AUM


Government Money market funds (MASSIVE bid for T-bills)

Gov Money Market Funds


Total amount of AUM in Money market funds – 2.7 trillions US (JPM and Vanguard biggest players)

total amount AUM in money market funds


One month LIBOR



Two Year US generic Government yield…

Gov yield



  • This is potential LIQUIDITY RISK.
  • The world is short  USD – a survey among Japanese banks with branches in New York shows 2/3 of their funding is raised through US based CP programs! (Hence the BID over for JPY currency swaps)
  • At bare minimum this is US bullish – as the “hedge” against being short US funding is to own…..US Dollars..


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