Yesterday afternoon, Federated Investors, the third largest manager of money funds, published an update on current events entitled, "Plain talk about money market funds in today's markets. The Q&A with Federated money fund guru Debbie Cunningham says, "The money market fund industry has not been immune to the turmoil in the credit markets," and discusses the subprime crisis, liquidity, CP, the muni market and the Treasury Department's insurance program.
Cunningham says, "The Treasury, Federal Reserve and overseas central banks are working furiously to calm global credit markets amid widespread fear and volatility. We saw yields on Treasury bills drop to near zero in mid-September as investors rushed to their relative safety, while rates on normally stable commercial paper and other short-term instruments soared as buyers shunned them. The spreads between Treasurys and other sources of short-term debt have remained high."
She continues, "There have been signs of a turnabout this month, aided by the Fed's landmark decision to buy companies' commercial paper and, in conjunction with moves by other central banks, to lower the Federal Funds rate half a point. The Treasury's extension of its $700 billion rescue package to include direct purchases of stock in banks -- and similar actions by governments in Europe -- also helped boost liquidity. But it remains unclear how long it will take for credit markets to return to more normal behavior."
"Some money market funds have owned problematic securities related to subprime mortgages. The collapse of the subprime mortgage market spilled over into several major financial institutions that either directly held mortgage-backed securities or insured them, causing some of those institutions to fail and others to receive government assistance to stay afloat. This impacted some non-Federated money funds that were invested in these institutions. In this environment, we continue to manage Federated money market funds with an unrelenting focus on credit analysis to minimize risk and we continue to maximize liquidity," says Cunningham.
She adds, "Our money market funds, and all money market funds, always work to maintain a $1 net asset value. But additional liquidity has been what our clients have sought over the past several weeks. We need to comfort and assure our shareholders that they will have a $1 NAV and liquidity at any point that they need it. While yield might suffer slightly, our goal, because of what is happening in the marketplace, is managing for liquidity within the portfolios. Federated's portfolios continue to buy overnight instruments to provide more daily liquidity for shareholders."
On CP, she says, "From a quality perspective and from a diversification perspective, asset-backed commercial paper has always been one of the desired asset classes for Federated's prime money market funds. This is still the case. Across the industry, money market funds are the biggest buyer of commercial paper, but in the first two weeks of September, money market funds shied away from commercial paper due to a greater focus on maintaining liquidity within a portfolio. The Oct. 7 announcement by the Fed that it would begin to purchase commercial paper from U.S. issuers should help to restore more normal behavior toward commercial paper."
For the entire Q&A, visit Federated's website.
