U.S. money market funds struggle as short-term rates approach negative territory

A sector of the U.S. financial industry that deals with saving $ 4 billion for individuals and businesses has been under severe pressure as U.S. markets flirt with negative interest rates.

Money market funds investing in short-term public debt have raised hundreds of billions of dollars in new money from savers in recent months. But there is stiff competition to take advantage of a declining supply of low-risk assets that generate positive returns.

The result has been pressure that has pushed some debt yields below zero, making the industry unprofitable and a challenge for the Federal Reserve, which analysts say may have to weigh in to keep positive American interest rates.

If government money market funds are to continue to invest at zero percent, the industry’s economy “breaks down,” said Christopher Tufts, global head of money market business management at JPMorgan Asset Management. “I wouldn’t be surprised if the funds started to limit investors’ subscriptions or closed directly to new ones. [money]”.

“It’s definitely not a pleasant place to operate in this time of storm,” said Deborah Cunningham, investment director of global liquidity markets at Federated Hermes, one of the world’s largest money market fund managers. “There really isn’t much value anywhere.”

The downward trend in short-term interest rates has sharpened in recent weeks as it has entered the financial system more effectively.

There has been a steady drip from the Fed, which buys $ 120 billion from the Treasury and securities with a mortgage agency every month. The Treasury department has aggravated the situation by distributing funds associated with the Biden administration stimulus package approved in March.

At the same time, the Treasury has also been reducing the stock of short-term bonds outstanding as part of its efforts to extend the maturity of the government’s outstanding debt.

In some cases, investors have had to effectively pay the privilege of lending to the U.S. government, as Treasury bonds maturing in one month recently fell from zero. The rate at which investors exchange Treasury cash and other high-quality collateral for cash in the rest market, another basic source of income for money market funds, has also sometimes turned negative.

Peter Crane, editor of Crane Data, estimated that the average seven-day return on top-tier government funds in the money market is now around 0.02 per cent, well below the 1.39 per cent level. one hundred seen at the end of 2019. Most money market funds have waived commissions for investors as they would consume supply performance.

Despite poor yields, assets in government money market funds rose above $ 4 million for the first time the week ended May 26, according to data from the investment company’s Institute.

Some of these entries come from the banks that they have been urging large corporate clients to direct cash to money market funds rather than deposit it into their accounts. U.S. bank executives say they are struggling to use the accumulated money instead of deposit, leading to strict capital requirements they prefer to avoid.

Money market fund managers with few good investment options have increasingly turned to the Fed, which offers some selected banks and investment groups a place to store cash overnight through its fundraising program. reverse replacement (RRP) at a zero percent interest rate.

A record $ 485.3 billion it was run there last week, earning nothing, and according to Doug Spratley, head of T Rowe Price’s cash management team, it has become “crucial” to the industry.

“If we need guarantees for the day and get negative street rates or zero even street rates, we will go to the Fed and consider it the right trade for the day,” Cunningham of Federated Hermes said. “When others get to more expensive prices, the Fed has zero value.”

The Fed itself faces pressure to intervene in short-term markets. Its benchmark rate, the federal funds rate, has fallen along with other short-term rates and is now well below the average of zero percent to 0.25 percent. It has recently fallen 0.01% to 0.05%, according to the New York Central Bank branch, a level that many strategists believe could force the Fed to act.

Richard Mejzak, head of global portfolio management at BlackRock’s cash management group, expects an increase in both the RRP rate and the Fed’s interest in banks for their central bank reserves, perhaps as soon as possible. such as the next monetary policy meeting this month.

Without some relief, the “longevity” of the money market industry could be at risk, warns Mark Cabana, Bank of America’s rate strategist.

“Monetary funds have already given up quotas and are earning virtually zero,” he said. “There are questions about how long monetary funds can remain viable as harmful entities.”