by Joe Sarbinowski, Global Head of Liquidity Management Distribution, DB Advisors, part of the Deutsche Bank Group
The money market fund sector, for many years a vital cash management support for treasurers worldwide, faces a stiff test. Yields on short-maturity securities are at or near record lows and the supply of high quality debt is tight. US commercial paper issuance has fallen by more than 40% since 2008 to about $1tr today, as banks and other issuers have cut their reliance on short-term funding. In Europe, the sovereign debt crisis has squeezed the volume of eligible securities available to money market funds.
Meanwhile, far-reaching new regulations are being considered, intended to reduce the risks associated with money funds even further. But the rules are also likely to limit funds’ yield potential and increase the costs of running them. Capturing the darkening mood, in October a Bloomberg headline declared – with almost Dickensian gloom – that the present was the ‘Worst Time For Money Funds’.
Not so fast. These may not be the best of times, but don’t write off money market funds too early. We have no doubt they will continue to play an important role for many investors. In fact, through all the uncertainty, the stable NAV concept continues to thrive: funds under management for IMMFA members remain on an upward long-term trend, standing at over €450bn in September. Nevertheless, money market funds are evolving, with important implications for the investors that use them.
One size won’t fit all
While we do not know precisely how regulatory changes may reshape the sector, money funds are unlikely to be the one-size-fits-all solution they once were. These investment vehicles will almost certainly have to make more of a trade-off between the three golden promises of security, liquidity and yield.