Bloomberg Bearish on Prime MMFs
Bloomberg wrote, "Money Markets Have a $750 Billion Problem in Zero-Rate World," which explains, "A $750 billion industry still struggling to bounce back from the last crisis is cracking under the Federal Reserve's lower-for-longer mantra on U.S. interest rates. Prime money-market funds -- a long-time favorite for anyone seeking a cash-like investment with a little extra yield -- are facing an existential challenge, just four years after a regulatory overhaul to restore confidence in the wake of the global financial crisis. Assets in these vehicles dropped 20% in just six weeks earlier this year, spurring talk of new reforms. But some of the industry's leaders are opting for another solution: Shutting them down." The article explains, "Vanguard Group, the world's second-largest asset manager, is converting a $125 billion fund to buy government debt rather than the short-term corporate notes it's invested in for decades, and Northern Trust Corp. and Fidelity Investments have recently axed funds with a similar focus altogether. The decisions entrench a prolonged decline for prime funds, and could hurt a market that thousands of companies rely on for funding. The strategies are collateral damage from the Fed's aggressive approach to suppressing rates for years to come. The realization that these funds, which are supposed to provide an edge over more-conservative alternatives, aren’t going to get much more attractive any time soon is a grim prospect for investors who must often stomach limits on redemptions -- known as gates -- to buy them. Asset managers are in turn finding their fees increasingly difficult to justify." Bloomberg adds, "While the latest turmoil for money-market funds fell far short of 2008's mayhem, the re-emergence of fears around redemptions suggests another overhaul is likely.... BlackRock Inc. wants to create a new platform to trade commercial paper to bolster the liquidity of these holdings. That would leave prime funds less reliant on skittish secondary markets and potentially strained dealer balance sheets, according to Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes in Pittsburgh.... Fewer funds could ultimately reduce demand for commercial paper and push rates higher, but yields are currently only a fraction of where they were before the Fed slashed its target policy rate to near zero."
