The Financial Times writes "Repo fee hits money market funds", which says, "Hundreds of billions of dollars invested in money market funds face almost zero returns after sharp falls in short-term interest rates. The key interest rate for funding trades in US Treasuries fell to a tiny fraction of 1 per cent on Monday. Nearly a third of the $2,750bn that sits in US money market funds is invested in the repurchase or repo sector, trading in which has been hit by a new charge levied on banks at the start of the month by the Federal Deposit Insurance Corporation."

The article explains, "The plunge in short-term interest rates, to just 0.01 per cent, is also due to the temporary absence of some Treasury securities, after wrangling in Washington over the US debt ceiling, that would help soak up excess cash. Bearish positions in government bonds by dealers is another factor behind the squeeze in rates."

Author Michael Mackenzie writes, "The latest drop in rates compounds the already low level of returns money market funds have made since the Federal Reserve set overnight interest rates in a band of zero to 0.25 per cent in December 2008. Analysts are predicting further flows out of money market funds."

The piece quotes George Goncalves, head of interest rate strategy at Nomura Securities said there was 'a potential hastening of the shift from money market fund assets into bank deposits as money market outflows continue with low yields'."

It adds, "The drop in short-term interest rates, notably in the repo market, is a blow to the sector as money market funds exchange their excess cash for Treasury securities. With some banks reducing their presence in the repo market due to the FDIC charge, more cash is now available to invest, pulling short-term rates down. The general collateral rate used in the Treasury repo market traded at 1 basis point on Monday.... Other short-term rates for Treasury bills and commercial paper have dropped since the start of April with three-month bills at 4bp on Monday."

FT says, "Peter Crane, president of Crane Data, which tracks money market funds, said 27 per cent of the market was placed in the repo market. They quote Crane, "These kind of rate levels do not help and in the past two years we have experienced periods of low and even negative rates in the repo market. What matters is how long it lasts."

While they may in coming days, the yields on money market funds have not moved lower yet. Our Money Fund Intelligence Daily publication shows Crane Money Fund Indexes 7-Day Yields flat on Friday. Of course, given the proximity of all funds' net yields to zero (and the continued resistance to allowing any fund to "go negative" with its yield), any downward move in rates is likely absorbed by fee reductions instead of being passed through. Our Treasury Institutional and Government Institutional Crane Money Fund Indexes are already at rock bottom (0.01%), while the Crane Prime Inst MF Index has yet to be moved by the near-zero repo rates at 0.08%.

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