Money Funds Waive Charges to Keep Yields From Falling Below Zero (#Bitcoin?)
Roughly $5 trillion industry faces pressure as interest rates plummet. Money Funds Waive Charges to Keep Yields From Falling Below Zero (#Bitcoin?)
Many investment firms are waiving their charges on money funds to keep the yields that investors earn from dropping below zero.
Money-management giant BlackRock Inc. is waiving costs typically borne by customers for certain money-market funds to prop up investor yields, said people familiar with the matter. Fidelity Investments, Federated Hermes Inc. FHI 1.85% and J.P. Morgan Asset Management are also ceding some fees to stave off negative yields.
The moves are the latest sign of how a roughly $5 trillion piece of the financial system is bracing for new pressure as interest rates plummet. Fee waivers will hit the revenues of firms that shoulder the costs.
All types of investors—from individuals and corporations to pensions and hedge funds—use money-market funds to park cash safely while earning some pocket change. If an investor deposits money with a brokerage, for example, that money can sit in a money-market fund until the investor decides what to buy.
But investment firms don’t just hold those funds. They buy highly rated debt with the money, passing on some of the returns to investors. As this industry has grown, money funds have become a critical source of short-term funding for the U.S. government, companies and municipalities.
Today, the income offered by those funds is evaporating as rates plummet. The Federal Reserve cut its short-term benchmark rate to between zero and 0.25% to calm markets in March and pledged to keep rates near zero for the near future. Three-month Treasury yields were 0.0928% as of Aug. 21, from 1.546% at the end of last year.
As U.S. money funds are forced to invest new cash into lower-yielding securities, their own yields are plunging.
Seven-day net yields for the average money fund slid to 0.05% in July from 1.31% at the end of 2019, according to research firm Crane Data. The average money fund is yielding a wisp today compared with the 2.11% seven-day yields at their prior high in April last year.
“The reality of money-market funds is it’s no longer about return on capital,” said Keith Berlin, head of fixed income at consulting firm Fund Evaluation Group. “You’re not going to make any money until the Fed raises rates.”
Add fees, and investors could end up losing part of what they originally invested. That possibility might make stuffing cash under a mattress more attractive. So firms running those funds must either forfeit fees or find ways to shift costs away from investors.
Among large players, Fidelity is waiving fees on most of its money funds.
BlackRock had warned Wall Street analysts this year it might have to waive fees as soon as August or September to prop up money-fund yields. For now, any costs shifted from money-fund investors to avoid negative yields are being absorbed by distributors and not the firm, a person familiar with the matter said.
Many firms made similar moves after the last financial crisis to prevent their investors from being saddled with negative yields.
“It’s going to become a battle among the largest firms over who can shoulder costs longer—until their clients get more comfortable moving into the firms’ riskier strategies,” Mr. Berlin said.
Moody’s Investors Service said that the cost of the average U.S. money fund fell 12% between February and June to about 21 cents for every $10,000 invested. As investors poured into safe-haven assets during an economic slump, a rise in money-fund assets offset the effect of lower fee rates and added to revenues. Moody’s analysts expect the industry to give up some of those gains later in the year as yields shrink.
Deborah Cunningham, Federated Hermes’ chief investment officer for global liquidity markets, said falling yields could squeeze smaller players. This would drive more concentration of an industry where the largest already dominate. The top 25 money-fund players control more than 90% of assets in the U.S.
Last year, Federated Hermes absorbed assets of money funds of another Pittsburgh institution, PNC Capital Advisors. Ms. Cunningham thinks the firm could do more such deals. “The opportunity is likely to present itself,” she said.
Asset managers will stave off losses as long as investors keep piling into cash funds, or if more lucrative products offset falling revenues from their money funds.
The Fed’s moves to keep interest rates near zero created fee pressures, but the Fed also rescued the industry from the brink earlier this year.
In March, the industry came under stress as the coronavirus shook markets. Dealers refused to trade even safe instruments such as commercial paper and Treasurys. Institutions pulled cash from prime funds, a kind of money fund that invests in corporate securities. The Fed stepped in with aggressive backstop measures and launched a lending facility to prop up money funds.
The shock sparked debate among regulators and investment firms about what needs to be done to bolster the resilience of money funds.
Today, about two-thirds of U.S. money funds are waiving costs for investors to keep yields from going below zero, according to Crane Data’s estimate. Funds focused on the lowest-yielding government securities and those with high distribution fees have been first in line to see fees waived, investment professionals say.
Shrinking Money-Market Funds Threaten Global Dollar Supply
A major source of greenbacks for international banks has begun to shrink again, which could threaten major non-U.S. banks that have come to depend on it.
After the money-market panic in March, assets in the prime funds, which invest in short-term corporate debt, rocketed back up in April and May. They are now sliding once again, posing a threat to non-U.S. banks that rely on them.
According to data from the Investment Company Institute, the assets of prime money-market funds ran to $741.62 billion on Wednesday, down $24 billion from its rebound level in late June and down sharply from its 2020 peak of about $810 billion in mid-February.
Without the stable dollar deposit bases of American lenders, yield-hungry foreign banks have relied on these funds as a source of dollar borrowing in recent years.
In times of stress, U.S. banks can count on deposits, but prime fund investors are far more flighty. The plunge in assets this year contributed to decisions by Fidelity and Vanguard to wind down major money-market funds.
Under the hood, the picture is actually even more acute. The proportion of prime-fund assets made up of commercial paper and certificates of deposit has declined, while the share of government and agency bonds surged to 25.5% by the end of July from 7.3% at the start of 2020.
t is also not too early to start thinking about how the world’s largest banks typically behave at the end of the year, when trading thins at the same time they attempt to dress their balance sheets to avoid higher capital requirements under Basel III regulations.
Credit Suisse analyst Zoltan Pozsar notes that Citigroup, Goldman Sachs and Bank of America have already been pushed into higher capital surcharge buckets this year. J.P. Morgan hasn’t only jumped one bucket higher, but is close to entering a second. If major U.S. banks restrain their usual activity in currency swaps toward the end of the year, it will provide an additional squeeze on foreign institutions searching for greenbacks.
The ultimate result depends on the Federal Reserve. If the U.S. central bank remains as accommodative as it has been so far, foreign banks likely have little to worry about. Currency swaps between central banks did the trick in calming strained funding markets in March.
But the situation may change if financial distress is concentrated among international lenders. Despite its largess this year, the Fed has no specific mandate to provide support to overseas banks. In that context, the thinning demand for a major funding source is worth keeping an eye on.
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