Moody's on Negative Yields, Euro MFs
Moody's Investors Service published a report entitled, "Negative Yields Alone Will Not Trigger Downgrades of Euro Money Funds." It reads, "The persistent low interest rate environment and ultimately the European Central Bank's (ECB) decision to cut its deposit rate to -0.2% in September 2014 have significantly eroded returns for euro-denominated money market funds. Yields on most euro money market funds (MMFs) are nearly zero, and this is despite the fact that managers are already waiving most or all of their management fees. In our view: Rated euro-denominated MMFs could hit negative yields in a few weeks. Safety and liquidity will cost investors money if they remain in these funds. At this stage, the question is not if but rather when prime euro MMFs will post negative yields. The exact timing would depend on each portfolio's structure (maturity and credit allocation) and fee policy. MMF investors will then have to make a choice between paying for the safety and liquidity of an MMF or investing in positive yielding products with weaker liquidity and riskier credit profiles. Negative yields alone will not trigger MMF rating downgrades. Funds that can operate within a negative yield environment and continue to meet the investment promise they made to their shareholders are unlikely to experience a rating change, provided that their portfolios' credit and stability profiles under Moody's MMF rating methodology remain consistent with their current ratings. These include variable net asset value (VNAV) MMFs or constant net asset value (CNAV) MMFs that have established a share class reduction mechanism and have informed their shareholders. Negative yields, however, will exert pressure on managers, forcing them to alter their investment strategy which may, in turn, negatively impact ratings.... [I]n a negative yield environment, money market funds will likely face their biggest challenge yet." (Note: While Euro money fund yields have inched lower from 0.02% to 0.01% in October, assets have jumped from 87.8 billion euros to 95.9B.) Also, Money Magazine published a piece, "Why Your Money is Still Not Safe Enough in Money Funds," written by Sheila Bair, former chair of the FDIC. She writes, "The law of unintended consequences often comes into play when regulations get too complex. Take the Securities and Exchange Commission's new rules to reduce the risk of runs on money-market mutual funds." Finally, Reuters wrote, "U.S. Fed Rewards Most Reverse Repos in Over Four Weeks"." The brief says, "The U.S. Federal Reserve awarded $186.28 billion in fixed-rate reverse repurchase agreements on Friday, the highest amount in more than four weeks, due to strong investor demand for ultra short-dated, risk-free assets at month-end."
