Cash & Liquidity Management

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The Growth of Government MMFs Since early August 2007 when investors became aware of problems with subprime mortgages, primarily in the United States, money-market funds both in the US and abroad have been the recipients of huge inflows of cash. Investors have fled from money-fund-like cash funds, both in the US and abroad, after learning that these funds are less like money market funds than some were led to believe.

The Growth of Government MMFs

by Connie Bugbee, Managing Editor, iMoneyNet

Since early August 2007 when investors became aware of problems with subprime mortgages, primarily in the United States, money-market funds both in the US and abroad have been the recipients of huge inflows of cash. Investors have fled from money-fund-like cash funds, both in the US and abroad, after learning that these funds are less like money market funds than some were led to believe.

Until August, these cash funds had attracted sizeable amounts of assets from investors who were seeking returns slightly higher than those offered by money-market funds. One of the largest holdings in many of these funds was tied to subprime mortgages that had been pooled and sold to the funds as structured investment vehicles.

The attraction of money-market funds in both the US and Europe has grown considerably during this period of turmoil.

Nearly nine months have passed since the start of the subprime crisis. During the past nine months, interest rates both in the US and the UK have fallen, with rates in the US 250 basis points lower now than they were prior to August. The Federal Reserve lowered the fed funds rate by 50 basis points to 4.75 per cent in mid-September. The rate was lowered by 25 basis points in October and in December, and another 200 basis points through 18 March of this year.

The Bank of England has lowered its rate from 5.75 per cent as of 5 July 2007 to 5.00 per cent with three 25 basis-point cuts. The European Central Bank, on the other hand, has opted to leave the euro rate at 4.0 per cent where it has been since 6 June 2007.

The attraction of money-market funds in both the US and Europe has grown considerably during this period of turmoil. Gone are the days when a money fund’s yield would be its most attractive feature. Evidence of the change can be seen by observing the asset flows into money funds since August.

Record amounts of assets

As the table illustrates, money market funds that invest only in government securities have attracted record amounts of assets, both in the US and in Europe.

Assets of government institutional funds in the US have more than doubled since August while assets of non-government (prime) institutional funds have increased by 17.7 per cent during the same time period. Asset growth of money-market funds primarily used by retail investors in the US has been less dramatic, but substantial.

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