Today's Investors Business Daily features the story "Money Funds Are Facing Rate Pressure", which discusses in depth the issue of near-zero rates on Treasury bills and their impact on Treasury money market funds.
IBD says, "The walls are closing in on Treasury money market funds. With rates near zero on the new short-term Treasury securities they must invest in, it is becoming increasingly hard for these money funds to remain profitable and still have positive yield. At worst, some such funds could be forced to merge or fold. More likely, funds will raise or impose fees. Others have closed to at least some new money."
"This situation may pose a survival threat to a handful of the highest-expense Treasury funds," IBD quotes Peter Crane, president of Crane Data, which tracks money market funds. "But Treasury funds overall are still yielding on average just under 0.20% (as of Jan. 5), an all-time low. And that's net -- with fees taken into account."
IBD continues, "And what happens if the Federal Reserve keeps short-term rates low for a long time or pushes them down more, and a fund does not cut its expenses while raising add-on fees? Some funds' NAV could fall below $1, a catastrophe for money funds. But it would happen slowly." The paper quotes Crane, "Instead of 'breaking the buck,' it's more a slow erosion. If you had negative yields - for example, if Treasuries paid zero percent and funds average a 0.5% expense ratio - it would still take a year to erode their NAV to, say, 99 cents. That's because at the outset some of their holdings would be older securities, paying more."
Finally, the article says, "The decline in short-term interest rates is a potential threat to Treasury money funds, but not so much for other categories of money funds. That's because Treasury money funds invest mostly in short-term Treasury securities."
To see a ranking of Treasury funds by their latest yields, request a copy of our Money Fund Intelligence Daily or Money Fund Intelligence XLS.
