It’s hard times for money market funds.
With the repo market broken, and new post-crisis regulation, they’re left to cope as best they can with what’s essentially a broken business model in an environment of extremely low interest rates.
Just look at the below chart from Joseph Abate at Barclays Capital.
The funds are now yielding less than a checking account at a bank:
Money market funds (MMFs) do invest in cash-like assets — US Treasuries, repo market T-bills and the like — but they’re meant to yield a little more than you’d get just letting your money sit in some some bank account. Instead MMF yields have been literally flatlining to decade-lows of 0.01 per cent.
And with them, the MMFs themselves.
Why do we care? For a start, Barclays’ Joseph Abate paints a particularly gloomy picture of MMF prospects — at least until the Federal Reserve’s quantitative easing comes to an end, and T-bill issuance starts up again. There are a few things the funds can do to cope with low rates and an illiquid market in the meantime — such as buying higher-yielding but longer duration assets– but they’re not huge.
Mostly the MMFs are stuck.
And one day the Federal Reserve will need them. Back to Abate:
These low returns and increased competition from bank deposits are driving cash out of money funds. Bank checking accounts yield more than money funds (Figure 4). At the same time, the FDIC’s provision of unlimited deposit insurance on non-interest bearing transactions accounts (through December 2012) [i.e. government-guaranteed bank deposit accounts] has made these balances closer substitutes for government-only money funds – especially for institutional investors. Since the start of the year, institutional government-only money fund balances have shrunk by nearly 10%, and we expect further significant shrinkage this summer. Ultimately, the departure of these balances could complicate the Fed’s future efforts to drain reserves by reverse repos since the capacity of the Fed’s program depends critically on the ability for money funds to absorb the central bank’s collateral.
Related links:
Lipper’s fund trends report points to money markets - AdvisorOne
The emigration of the money market funds - FT Alphaville
Sympathy for the money market funds – FT Alphaville