Throughout the past 17 months of money market mutual fund stresses, nobody has been more visible and eloquent in communicating with investors and the broader marketplace on events in the cash sector than Federated Investors' Senior Vice President and Chief Investment Officer for Taxable Money Markets Deborah Cunningham. Cunningham keeps her "foremost spokeswoman of the money fund industry" title secure with yet another recent conference call and published communication, this one entitled simply, "Current issues in the money market fund industry." Below, we excerpt some of the highlights.
First, Cunningham is asked, "How does the Fed's 75-to-100 basis-point cut in the target federal funds rate impact money fund investors?" She answers, "It shouldn't have as dramatic an impact as it may seem simply because many short-term rates, including the market federal funds rate on overnight bank loans between banks (the Fed's target is simply an intended rate, not a required rate) are already trading in the new target range. [Indeed, Crane's Money Fund Intelligence Daily has shown money fund rates decline a mere 8 basis points over the past week.] Rates on highly rated commercial paper and overnight repurchase agreements have been hitting new lows in recent weeks, too. The Fed's move will likely add to downward pressure on these and other short-term instruments money market funds purchase."
She is also asked, "How is this low-yield environment affecting the way Federated money market funds operate? Cunningham responds, "We recognize and appreciate that our clients view us as providing a vital cash management service, and our goal of managing money market funds to provide a $1 NAV and daily liquidity at par has not changed. The current environment is putting pressure on money markets, where funds by law must be invested in shorter-term instruments with an average maturity of no more than 90 days. We have many products that invest in highly rated government agency and corporate securities, where yields have fallen, but our Treasury-related offerings have been impacted the most because the universe of investment options is limited. We have taken steps to offset the lower yields on these Treasury money market funds, including waiving certain fees."
"What does it mean when Treasury securities have a zero or negative yield? For Treasury securities to have a negative yield, the investor not only would accept no return for his or her investment in a Treasury security, but effectively would be willing to accept a return of below-zero for the security of owning Treasurys. This happened briefly recently in the secondary markets, where investors trading with one another were willing to accept a three-month T-bill yield of negative 0.01%. This occurred the same day the Treasury auctioned four-week T-bills at zero yield, meaning after four weeks, buyers of the bills would get back only what they paid, with no interest. There are ways yield could be considered negative without an actual negative interest rate on Treasury securities, such as when the securities are purchased through a fund or intermediaries where expenses more than offset the Treasury yields," she says.
Finally, Federated asks, "Where should money market investors look for higher yielding alternatives? Cunningham writes, "Investors looking for yield should consider one slight step out the credit spectrum from Treasury products to government agency products. Federated government agency money market funds invest primarily in U.S. Treasury and government agency securities, including repurchase agreements that are fully collateralized by U.S. Treasury and government agency securities. Government agency money market funds can provide an alternative to investors who are seeking relative safety through Treasury-only products. `An additional alternative a bit further out the credit spectrum would be other high quality funds, such as Federated prime money market funds, that provide a relatively safe and liquid investment solution via investments in bank certificates of deposit, commercial paper and other high quality, non-government-related paper."
