Companies continue to keep their cash in prime money market funds despite looming rules that will make them less attractive. One reason is the effects of the Federal Reserve’s December rate hike, which is giving prime funds better yields than government funds.
Many companies have begun switching out of prime funds and over to government funds because governments will be able to keep a fixed net asset value. Starting in October institutional prime and institutional municipal MMFs will begin trading with variable net asset values. And beginning in the middle of this month, these funds will be required to publish market-value NAVs.
What’s happening, says one industry expert, is that companies want to squeeze out as much yield as they can for as long as they can. “They know they’re going to give up some yield” when they switch over to government funds—in fact, about 20 basis points, he says. “So the treasurer is sitting there saying, ‘Well, why should I do that today? Why don’t I just grab my 20 basis points for the next three or four months? Maybe I’m not going to wait until October 1 to make the change, but I certainly don’t have to do it on April 1.” He acknowledges that companies should none-the-less be preparing portfolios and policies to enable a quick switch.
Brian Leach, VP, product manager at PIMCO says companies are also waiting to see how the economic situation plays out. “It’s not necessarily complacency on the part of investors – in many cases it’s diligence,” Mr. Leach says. “Many investors may prefer to wait and see into the summer – by this time they’ll have more data on the economy, yield levels, and potential new funds. They prefer to have the full complement of data points to help drive their decisions. And that picture may become clearer as we approach October.”
Also underpinning the prime MMF market has been banks, according to Fidelity Investments. “Flows into MMFs have been trending higher in recent months thanks in part to the efforts of larger banks to cost-justify their deposits, given enhanced regulations,” Fidelity said in a report. “Supply of repurchase agreements (repos) helped to reduce MMFs’ use of the Fed’s overnight reverse repurchase agreements (RRPs) facility. That said, MMFs continued to be the primary participants utilizing the RRP facility.”
The reverse repo program was supposed to be a temporary measure, but many money market firms – particularly those converting their prime funds to government-only funds – are under the impression that it will be around indefinitely. But the Fed has warned that it won’t be. “We would not want to see growth in government-only money funds if it were predicated on a mistaken impression that ON RRP [overnight reverse repo program] would be around indefinitely and with high capacity,” said New York Fed markets chief Simon Potter in February.
Some observers think the program will stay around for some time, comparing it to a toll booth that is put up “temporarily” but in reality will never go away.