US Money Market Funds Struggle As Short-Term Rates Close To Negative Territory

A sector of the US financial industry that handles $ 4 billion in savings for individuals and businesses has been strained as US markets flirt with negative interest rates.

Money market funds investing in short-term government debt have received hundreds of billions of dollars in fresh money from savers in recent months. But there is stiff competition to exploit a diminishing supply of low-risk assets that generate positive returns.

The result was a squeeze that knocked the yields on some debt below zero, rendering parts of the sector unprofitable and creating a challenge for the Federal Reserve, which analysts say may need to weigh to keep prices down. positive US interest rates.

If public money market funds are to continue investing at zero percent, the sector’s economy “collapses,” said Christopher Tufts, global head of portfolio management for money market operations at JPMorgan Asset Management. “I wouldn’t be surprised if the funds start to limit investor subscriptions or close entirely to new ones. [money]. “

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

The downward drift in short-term interest rates has intensified in recent weeks as more liquidity has poured into the financial system.

A steady decline came from the Fed, which buys $ 120 billion in treasury bills and agency mortgage-backed securities each month. The Treasury Department made matters worse by distributing funds associated with the Biden administration’s stimulus package adopted in March.

At the same time, the Treasury has also reduced the stock of short-term bills in circulation as part of its efforts to lengthen the maturity of outstanding public debt.

In some cases, investors have actually had to pay for the privilege of lending to the US government, since treasury bills with a maturity of less than one month have recently yielded less than zero. The rate at which investors trade treasury bills and other high-quality collateral for cash in the repo market, another source of basic income for money market funds, has also turned negative at times.

Peter Crane, editor of Crane Data, estimated that the seven-day average return on leading government money market funds now hovers around 0.02%, well below the 1.39% level seen at the end of 2019. The Most money market funds gave up. fees for investors, as they would eat away at the yield offered.

Despite meager returns, government money market fund assets exceeded $ 4 billion for the first time in the week ending May 26, according to data from the Investment Company Institute.

Some of these inflows have come from banks urging large corporate clients to direct their liquidity into money market funds rather than depositing it into their accounts. U.S. bank executives say they’re struggling to use the cash accumulated in deposit accounts, triggering strict capital requirements they’d rather avoid.

Line chart of money parked in the Fed's repo facility, in billions of dollars showing money market funds turning to a 'crucial' facility

Money market fund managers with few good investment options are increasingly turning to the Fed, which offers some banks and investment groups a place to store money overnight through its program. reverse repurchase agreement (RRP) at an interest rate of zero percent.

A record $ 485.3 billion was headed there last week without making any money, and according to Doug Spratley, head of the cash management team at T Rowe Price, it has become “crucial” for the industry. .

“If we need collateral for the day and we get negative street rates or even zero street rates, we’ll go to the Fed and consider this the right deal for the day.” said Cunningham of Federated Hermes. “When others come to more expensive prices, the Fed at zero is valuable.”

The Fed itself is under pressure to intervene in the markets in the short term. Its benchmark rate, the federal funds rate, has fallen along with other short-term rates and is now well below the middle of the 0% to 0.25% target range. It recently slipped 0.01 percentage point to 0.05%, according to the New York branch of the central bank, a level many rate strategists believe could force the Fed to act.

Richard Mejzak, head of global portfolio management for BlackRock’s treasury management group, expects an increase in both the RRP rate and the interest the Fed pays banks on the reserves they hold at the bank. central bank – maybe as early as the next monetary policy meeting this month.

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

“Silver funds have already waived fees and they are making virtually zero,” he said. “There are questions about how long MMFs can remain viable as loss-making entities.”

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