Barron's on Prime Pressures, Exits
This weekend's Barron's asks "Prime Money-Market Funds Are Under Pressure. Could They Disappear?" The piece discusses the recent publication from J.P. Morgan. (See our Oct. 23 News, "JP Morgan Asks What If Prime MFs Disappear? Assets Decline 11th Week.") They write, "Prime money-market funds, which have $1 trillion in assets, were changed significantly by regulations addressing problems from the financial crisis. For instance, institutional prime funds do not hew to the traditional $1 per share net asset value. Prime funds invest in ultrashort-term corporate debt known as commercial paper.... So why might prime funds disappear? In short: They're becoming unprofitable to run. 'The Federal Reserve has taken short-term interest rates down close to zero, and they've told us that short-term rates will be very low for several years until they can get the inflation rate back up persistently, above 2%,' says Alex Roever, the report's co-author and JPMorgan's head of interest-rate strategy. That doesn't leave much room for money funds to be profitable for their management companies. More than 70% are providing fee waivers to avoid negative yields, the report notes. The average prime money fund yields just 0.03% according to Morningstar." Barron's explains, "Some have already decided to get out of the prime-fund business. Northern Trust liquidated its Northern Institutional Prime Obligations Portfolio this June after assets plummeted from $4.3 billion to $1.7 billion between February and May. Fidelity closed two institutional prime funds with $14 billion ... in June as well, and has since liquidated them. In August, Vanguard announced it was converting its $125 billion prime money fund into a government one." The article adds, "Not everyone says prime funds are endangered. 'It's certainly not a given that prime's going to disappear, and not even a given prime will shrink from this point on,' says Peter Crane, president of money-fund tracker Crane Data. In fact, the Crane Prime Institutional Money Fund Index, despite seeing outflows in March, has seen assets grow from $612 billion in early 2020 to $667 billion through the end of September. Meanwhile, the Crane Prime Retail Money Fund Index, has shrunk from $459 billion to $302 billion, but a significant portion of that came from Vanguard’s $125 billion fund leaving the space. 'The retail asset base [in money funds] is much more stable,' he says. 'Vanguard did not have a run in March, so it's a mystery why they're getting out.' But because Vanguard operates at cost, it has more difficulty waiving fees than competitors." They add, "It isn't even certain that outflows from prime money-market funds caused the liquidity crunch this March. Fund-industry trade group Investment Company Institute published a recent report noting that the yield spread on interbank lending widened significantly -- a mark of credit/liquidity distress -- during the March downturn prior to prime-fund outflows. Yet even if money-market funds didn't cause the liquidity crunch, that doesn't mean regulators shouldn't be concerned about panic selling. One way to ensure fund liquidity would be for the Fed to make permanent the Money Market Mutual Fund Liquidity Facility it created in March to support funds facing runs in the pandemic. 'That actually may make prime funds much more attractive than they've been heretofore,' Crane says."
