The December issue of Money Fund Intelligence stated that Goldman Sachs' Financial Square Treasury Obligations and GS Treasury Instruments "became the first money funds ever to pay a negative yield." This is incorrect. While a couple of share classes of these funds have reported negative 7-day yields, their daily 1-day yields, returns and dividends have remained positive. No "negative yields" have been passed through to investors.
A Goldman Sachs spokesperson tells us that the Treasury funds maintain an 'active trading strategy' and that 'short-term capital gains paid through' have assured that investors continued to receive positive dividends from the funds. Note that the 7-day yield formula that money funds are mandated to use by the SEC excludes capital gains and losses. But that investors actual returns and dividends, which are normally credited daily and paid monthly, include any realized gains and losses. (Though rare, gains do occur in money funds, especially Treasury funds.)
While a false alarm this time, the issue of 'negative yields' remains very real for money market funds. Should the Federal Reserve cut interest rates again, especially if they cut beyond another 1/4-point, some funds may indeed find themselves with expenses over and above the interest income they generate. Funds currently are waiving any amounts above their interest income in order to maintain positive yields (or to keep yields at zero). But this may become more difficult should rates decline further.
Money funds have begun discussions on how to handle a negative dividend, should it be needed. Crane Data assumes that it would be handled the exact opposite of a how dividends are currently handled. A daily negative credit would be accrued, and the account would be charged at the end of the month (instead of the dividend accruing then paying). Thus, a "negative dividend" would not involve "breaking the buck". But rather shares would be sold from the account in order to pay fees monthly, which would not be much different from how checking accounts used to charge a monthly fee. We'll undoubtedly be researching more in the coming days, so let us know if you have any comments.
