Reading the two money-market fund outlooks from Moody’s Investor’s Service and Fitch Ratings can remind one of the refrain from the old Talking Heads song, “Once in a Lifetime”: Same as it ever was…Same as it ever was…Same as it ever was…Same as it ever was…
That is pretty much what MMFs have to look forward to in 2014: the same low rates, the same diminishing investment opportunities, the same possibility of big redemptions as cash managers seek predictable – and perhaps better – returns in the slew of other products rushing to fill the void that a no-MMF world could bring; and finally, the same threat of consolidation.
“The biggest story in 2014 will likely be the finalization—or near finalization—of new MMF regulations in both the US and Europe,” Moody’s wrote in its outlook. “Regulatory reforms that were proposed in 2013 will likely result in dramatic changes to the MMF product, to investor preferences, and transform the industry as a whole.”
Moody’s reminded readers that the regulatory changes were being formulated to “protect MMF investors by addressing structural vulnerabilities and attempting to reduce systemic risk associated with MMFs.” However, such rules could lead to the aforementioned large redemptions, according to Fitch, which means there might not be that many customers left to protect. Moody’s itself predicts outflows from MMFs could equal 30 percent when incoming rules — a floating net asset value, buffers et al — are implemented.
In its note, Fitch suggested cash managers and treasurers should already be looking at alternatives. “In preparation for potential changes, managers have been reviewing their offerings and discussing alternative liquidity products with clients,” Fitch wrote.
And companies are already looking and getting a bit antsy in the process. Many are creating separately managed accounts or shifting funds to bank deposits; they’re also exploring other short-term liquidity products from a host of companies, including PIMCO, BlackRock, StoneCastle Cash Management, Barclays and Guggenheim Investments among others.