Remember when cash had some easy options that were a slam dunk, no brainer? All you had to do was select a highly rated money market fund, and you received overnight liquidity, safety and no market principal fluctuation. The only downside was that money market funds more recently have offered almost zero yield.
But this has all changed since the SEC’s July 2014 adoption of new money market fund reform rules. These new rules, which will go into effect in October of this year, require a floating net asset value (NAV) for institutional prime money market funds, which will see prices fluctuate along with changes in the market-based value of fund assets. The rules also provide the funds with new ways to stop a “run on the fund” with liquidity fees and redemption gates. The SEC gave investors over two years to ponder this new cash investment decision. While some investors have thought about the various options some investors have chosen to sit on the sidelines.
Not only is the money market fund structured changing, it is expected that the regulations will also change the market. “Investors should be aware that some asset classes, including money market funds and the instruments they invest in, predominantly T-bills, will continue to be structurally restrained in terms of yield,” notes Jerome Schneider, managing director and head of the short term and funding desk at PIMCO. “Money market reform and bank capital requirements have increased demand for these securities, which is likely to keep yields low. T-bill and agency debenture issuance is also lower than historical levels, which may put further pressure on yields.”
Government money market funds are not subjected to the same new regulations. These funds will still be carried at book value and do not have fees and gates. Many investors are transitioning to Government funds to avoid the new regulations, which could add to their scarcity.
So many decisions to make, but even more questions to answer. Investors have to decide: do they stay in prime funds subject to the new rules? If already invested in a government fund: do investors stay there knowing that increased demand will drive the almost zero yield to possibly below zero?
Some decisions are being made for you. For example, Fidelity along with several other fund companies, has announced that its prime funds will transition to government funds. Also given the expected demand for government money market funds, will they close to new cash? Is there even enough supply to meet the increased demand? Will the decreased demand for prime funds drive up yield enough to justify the market value risk? So many questions for cash investors. When did investing in cash get so complicated?
The TIMPG and TIMPG2 group will be discussing this topic during the TIMPG Summit held in New York City hosted and sponsored by Goldman Sachs. For more information on joining this invitation-only group, please contact Barbara Shegog at [email protected].