US money market funds could be in for a mass exodus of cash in the second quarter, as cash managers start shifting money elsewhere ahead of coming MMF rule changes. Starting in October institutional prime and institutional municipal MMFs will begin trading with variable net asset values. Government MMFs will keep be able to keep a fixed net asset value. Prime MMFs will also will also in some circumstances be required to implement gates and fees.
“Up to 50% of remaining investor assets will likely leave US prime money market funds ahead of major regulatory reforms in October,” according to a recent release from Moody’s Investors Service. And according to the Investment Company Institute, as of May 6, 2016, there is approximately $764 billion in institutional prime. This number fluctuates week to week by several billion dollars but nonetheless, 50% would be a sizeable amount. The impact would be larger still if it all were to happen at the same.
Up until treasurers have been taking advantage of slight rise in MMFs yields after the Federal Reserve’s small rate increase in December. Many continue to take an “I can wait” attitude but it might be wise to get ahead of MMF returns completely flat-lining ahead of October.
Moody’s said that while US institutional funds will begin seeing a decrease in assets under management in Q2, their European counterparts could actually see stable investment levels if not an increase. That’s because worries over the UK leaving the EU, or a Brexit, have made euro prime funds a safe haven. “In anticipation of the Brexit referendum in June, Moody’s expects euro and sterling portfolio managers to increase their funds’ liquidity and exposure to government and agency securities,” the ratings agency said, “a positive for the funds’ credit quality and market risk profiles.”
Euro prime funds are also offering decent yields, and that is expected to stay the same until the outcome of the June referendum.