FT on MMF Fees; MSIM on Rates
The Financial Times published, "US money market funds reinstate fees." It says, "Money market funds have begun reinstating fees for investors, after the end of zero interest rate policy in the US has led to rising yields and improving returns.... After the Federal Reserve's historic December increase in the policy rate to a floor of 25 basis points, short-dated instruments have followed, with "t-bills" trading at 28 basis points on Tuesday morning, after peaking earlier this year at 34 basis points. An average of fees charged by money market funds, compiled by Crane Data, dipped to a low of 11 basis points in November 2014. Between the end of November 2015 and the end of January 2016 the average has jumped from 16 to 21 basis points. "Every basis point counts," said Peter Crane, who runs Crane Data. "For money market funds it's a godsend. They have been running on fumes for a number of years. They appear to still be waiving some fees and gingerly returning to normal levels. But no doubt they are bringing in more revenue due to the fed hike." The FT piece continues, "Increasing yields in government securities could also amplify an expected shift in assets out of prime money market funds into government-only funds. New regulation for prime funds, that invest in a broad array of short-dated securities, which comes into force in October, is expected to push some investors over to funds that invest solely in government assets.... The seven-day average yield for money market funds, before fees are deducted, has increased from 18 basis points at the end of November 2015 to 30 basis points at the end of January 2016, according to Crane Data. That increase has been higher for prime funds. Institutional prime funds have increased returns from 27 basis points at the end of November 2015 to 45 basis points at the end of January 2016, compared to a jump from 15 to 28 basis points for institutional government funds. An analyst at one European bank said: "The spread between prime and government will be critical to how much money leaves prime." In other news, Morgan Stanley recently issued commentary, "First Fed Rate Hike in Nine Years – What does it mean for you?" It says, "In volatile rate markets, active management of interest rate risk plays an increased role in money market fund performance. Leading up to this point, the Morgan Stanley U.S. Dollar denominated money market funds had been managed with shorter duration profiles and higher levels of liquidity than the industry averages. Our strategic portfolio positioning was influenced by our belief that we were not being properly compensated to extend our maturity structure and invest further out the curve. As yields adjusted higher in anticipation of the impending rate hike, we began to feel comfortable that interest rates properly reflected our market expectations.... [O]ur positioning entering this tightening cycle allowed us to be opportunistic and take advantage of higher yields, something that would not be possible to the same extent in funds with less liquidity or longer duration profiles. These actions resulted in strong performance, while still operating within the spirit of our overall defensive portfolio management framework. Despite these adjustments in portfolio positioning, we still maintain much higher levels of daily and weekly liquidity than required."
