Published: June 01, 2008
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.
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. [[[PAGE]]]
The universe of government funds reporting to iMoneyNet’s Offshore Money Fund Report(tm) is small, but growing. Two of the funds, JPMorgan USD Treasury Liquidity and BNY Mellon Universal U.S. Treasury have seen asset increases of more than 300 per cent since August as investors have chosen to invest in lower-yielding Treasury money funds despite lower yields. The BNY Mellon Universal U.S. Treasury fund has been in existence since November 1998 and has carried a top rating from Standard & Poor’s since December 1998. The fund was assigned Moody’s Investors Service highest rating last August.
Money market funds that invest only in government securities have attracted record amounts of assets both in US and in Europe.
The JPMorgan USD Treasury Liquidity fund has been in existence since October 2003. This fund has been rated by Moody’s, S& P and Fitch Ratings for more than four years.
JPMorgan launched the JPMorgan Euro Government Liquidity fund last December. Assets are pouring into this fund which now has four share classes reporting. The success of this first euro government fund to report to iMoneyNet has not gone unnoticed.
At least four additional government portfolios have been assigned top ratings by one or more credit rating agencies. Two of the four are US dollar-denominated money funds. Goldman Sachs U.S.$ Treasury Liquid Reserves Fund was assigned S&P’s top principal stability fund ratings on 31 March. Western Asset U.S. Treasury Reserves, Ltd, a newly-established Cayman Island spoke of U.S. Treasury Reserve (hub), was awarded a top money fund rating from Moody’s on 8 April.
The Goldman Sachs Euro Government Liquid Reserves Fund was assigned S&P’s highest rating on 3 April. This fund is a sub fund of Ireland-based Goldman Sachs Fund PLC. This fund will be offered to institutional, corporate and private clients and will invest exclusively in highly-rated Eurozone government securities and supranational securities, held directly or through repurchase agreements.
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Barclays Global Investors Euro Government Liquidity, a sub fund of Barclays Global Investors Cash Selection Funds PLC, was launched on 7 April and was assigned a top money fund rating by S&P on 9 April. Investments by this sub fund will be Eurozone short-term government securities and repurchase agreements backed by Eurozone government securities. Like the other treasury and government money funds, this fund will maintain an average maturity of 60 days or less. Investors will have a choice of share classes in both distributing and accumulating categories.
The significant growth of the offshore government money funds that have been in existence should lead to the development of more of these funds in the months ahead. The task of convincing board members that money market funds should be a component of a corporation’s cash management options should be easier for corporate cash managers because of the safety, liquidity and yield available in these funds. Since government money funds invest exclusively in highly-rated government securities, there is no need for concern about whether a government fund is holding securities which have fallen out of favour since last August.
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