Late last week, mutual fund news website ignites.com featured a piece written by Crane Data President & Publisher Peter G. Crane. The "MoneyVoices" column is entitled, "Is Yield Drought Passing for Money Funds?. It says, "While rising interest rates are not normally cause for celebration among money market fund managers, this time will likely be different. Short-term rate hikes by the Federal Reserve may still be a ways off, but recent hints of rising market rates and rising expectations of hikes may offer a lifeline to some funds with near-zero net yields."
Crane explains, "Money fund yields of course won't move significantly higher until the Fed moves. But the fact that six-month and one-year money market rates are now pricing in hikes allows funds some relief from the ultra-low-rate environment. Not only were the low yields beginning to have trouble covering expenses, but they also were beginning to drive investors into higher-yielding and higher-risk alternatives."
He tells ignites, "Approximately 15% of taxable money fund assets are currently yielding 0.01% or 0.00%, according to research from June's Money Fund Intelligence. These 272 funds (out of 890) are likely waiving substantial percentages of their overall fees. The fact that money fund liquidations have been surprisingly rare -- only a handful of funds have exited the business with none due to ultra-low yields -- indicates that the fee-waiving pressure is not fatal. But the merciless grinding of lower yields would undoubtedly have forced more funds to close to new investments, to merge, or to seriously consider exiting the business."
Crane continues, "Now, however, help is on the way in the shape of an upward-sloping yield curve. Federal funds futures were recently pricing in a near certainty of at least one rate hike by year end, though the odds have eased somewhat this week. While it's not clear how soon rates will rise, it's certain they will, and it's now looking as if it could be sooner than expected. Higher rates will help alleviate the fee-waiving issue that ultra-low yields bring. They should also help return money funds to a more level playing field vis-a-vis bank savings account and bond options."
The ignites piece adds, "Of course, rising rates bring risks too. Rate hikes would accelerate the modest outflows we've seen from money funds of late as institutional investors move to take advantage of overnight repurchase agreements (repos) and other rapidly reacting money market instruments. Rising rates also put pressure on NAVs, too, as bond prices decline. But these would be welcome trade-offs in exchange for the additional expense ratio breathing room and higher nominal yields."
Finally, Crane says to ignite.com, "So while the Obama administration's comments on regulatory reform and the SEC's proposed changes to the quality, maturity and diversity regulations governing money market mutual funds will be the main topics of discussion among money fund professionals in the coming week, both funds and investors have also gotten a glimmer of hope recently in the form of potentially rising rates."
