With the Federal funds target rate now at 1.0 percent and possibly poised to go lower, many are asking how badly money market mutual fund revenues would be hurt by an additional 1/4-point or 1/2-point rate cut. The answer is not very much by a quarter. But waivers would begin causing pain at one-half of a percent. While we don't believe the Fed will reduce rates below 1.0% for reasons beyond the impact on money funds, we don't believe that another 1/4-point, or even 1/2-percent move, would cause critical damage to money funds' revenue streams.
Using October 31 data from our November Money Fund Intelligence XLS spreadsheet, we ranked the 1,331 money funds tracked by Crane Data from lowest to highest yield. Approximately 79 funds, with $74.7 billion in assets had yields of 0.00% to 0.25%, and 92 funds, with $221.4 billion in assets had yields of 0.26% to 0.50%. These presumably would be the funds impacted by additional rate cuts, though the majority of these funds are Treasury funds. Treasury yields have been abnormally low due to the flight-to-safety, and its unclear whether additional rate cuts would, or could, force Treasury and repurchase agreement rates lower.
Twenty two of the lowest-yielding funds are yielding 0.05% and under. Most of these are likely already waiving some fees, and several funds have even been showing a yield of zero, and one is even showing negative yields. However, these funds represent a miniscule portion of the overall fund universe, and note that funds only must waive the portion of fund expenses in order to keep the yield at zero or just above.
Money funds with yields of 0.25% or lower represent just 2.2% of money fund assets, and funds with yields of 0.26% to 0.50% represent just 6.6% of assets. Crane Data estimates that this 8.8% of money fund assets brings in revenues of $1.3 billion annually, approximately 10.8% of total money fund revenues. A waiver of a full 0.25% on this segment would cost funds about $330 million on an annual basis, just 2.7% of total revenues. Note too that almost all of these highest-expense funds 12b-1 fees, shareholder service fees, or other revenue sharing agreements, and that the intermediaries distributing these 'B', 'C' or 'Service' shares would be expected to share the pain of any fee waivers, and that any waivers would be expected to be temporary and partial.
The bulk of money fund yields remain comfortably above the 1.00% Federal funds target rate. Premiums have been built into the commercial paper markets and LIBOR-related and floating rate products, so money fund yields have much more breather room over Fed funds than they have had historically. So though cuts would be uncomfortable, they would likely not cause critical damage to funds' revenue streams. (To request our most recent Money Fund Intelligence XLS or to request our lowest-yielding funds ranking and analysis, e-mail Pete.)
