$300b exodus looms for money market
Under regulations if weekly liquidity in the funds drops below 30%, the funds can impose liquidity fees
With a seismic overhaul of the $2.6 trillion (Dh9.5 trillion) money market industry weeks away from kicking in, money managers are bracing for a last-minute exodus of as much as $300 billion from funds in regulators’ cross hairs.
Prime funds, which seek higher yields by buying securities like commercial paper, are at the centre of the upheaval. Their assets have already plunged by almost $700 billion since the start of 2015, to $789 billion, Investment Company Institute data show. The outflow has rippled across financial markets, shattering demand for banks’ and other companies’ shortterm debt and raising their funding costs.
The transformation of the money-fund industry, where investors turn to park cash, is a result of regulators’ efforts to make the financial system safer in the aftermath of the credit crisis.
Prime funds will soon have to adhere to new regulations meant to safeguard investors in times of stress. If weekly liquidity in the funds drops below 30 per cent, the funds can impose liquidity fees or temporarily bar redemptions. Funds want to avoid crossing that threshold, pushing them to hold more liquid assets. Further, ahead of those reforms, many investors are also shifting their holdings out of prime funds altogether. Investors have pulled $733 billion from all prime funds since last October. Much of that money has flowed into government money market funds, which aren’t subject to the new rules.
While Yi sees the additional outflow from prime-fund investors potentially reaching $200 billion in the next 30 days, TD Securities predicted in a September 7 note that it may tally as much as $300 billion.
Yi is preparing by shortening his funds’ weighted average maturity and avoiding short-term debt that matures beyond September. He’s not alone. For the biggest institutional prime funds tracked by Crane Data LLC, the weighted average maturity of holdings fell to an unprecedented 10 days as of September 12. It’s not just floating net-asset values that investors are avoiding. Prime funds can also impose restrictions such as redemption fees.
Risky offerings
Amid the tumult, moneyfund assets have held steady because most of the cash leaving prime and tax-exempt funds has streamed into less risky offerings focusing on Treasuries and other government-related debt, such as agency securities and repurchase agreements. These funds are exempt from the new rules, which the US Securities and Exchange Commission issued in 2014.
A major repercussion of the flight from prime funds is that there’s less money flowing into commercial paper and certificates of deposit, which banks depend on for funding. As a result, banks’ unsecured lending rates, such as the dollar London interbank offered rate, have soared.
Three-month Libor was about 0.85 per cent last week, close to the highest since 2009.
Libor may stabilise after mid-October because prime funds may begin to increase purchases of bank IOUs, although the risk of a Federal Reserve interest-rate hike by year-end will keep it elevated, said Seth Roman, who helps oversee five funds with a combined $3.2 billion at Pioneer Investments in Boston.
“You could picture a scenario where Libor ticks down a bit,” Roman said. But “you have to keep in mind that the Fed is in play still.”