Reuters on MMFs and Puerto Rico

Aug 08 14

Reuters recently published "Unlikely Booster for Money Market Funds: Beat-Up Puerto Rico Bonds" The piece, by Tim McLaughlin, reads, "Money market funds run by Fidelity and American Beacon are relying on an unlikely source to juice up their returns: beat-up bonds issued by cash-strapped Puerto Rico. The funds have accepted the U.S. territory's debt as collateral on their short-term loans to Wall Street banks, and in exchange for that added risk are receiving a higher interest rate, according to public filings. As a result, American Beacon's $767 million fund has one of the best one-year returns in the industry, while Fidelity this year used at least one loan backed by Puerto Rico bonds to generate a yield about 20 basis points higher than U.S. Treasuries or bank certificates of deposit. The strategy comes as the money market fund industry seeks to retain investors spooked by new U.S. regulations, and could stir up worries about market risk that emerged after the 2008 financial meltdown, according to analysts. So far, repurchase agreements backed by some of the riskiest collateral make up just 3 percent of the $2.4 trillion in taxable money market fund assets, according to research firm Crane Data LLC. But that could grow if the improved returns among those using riskier collateral prove to be a draw for investors." It continues, "Money market fund sponsors downplay the collateral risk associated with repurchase agreements, saying their ultimate backstop is the bank on the other side of each transaction." "Prime money market mutual funds only enter into repurchase agreements with counterparties that represent 'minimal credit risk,'" Fidelity Investments, the largest U.S. money market fund sponsor, told Reuters in a statement. Reuters adds, "The $13 billion Fidelity Retirement Money Market Fund recently reported a $126 million repurchase agreement with Merrill Lynch, which had a yield of 0.38 percent and featured Puerto Rico bonds as most of the deal's collateral, according to fund disclosures. About 10 percent of the fund's repurchase agreements are backed by collateral considered more risky, according to Fidelity disclosures. Fidelity's fund returned one basis point for investors over the past year, a typical performance in the industry." In other news, ICI says in its latest "Money Market Fund Assets," "Total money market fund assets increased by $12.78 billion to $2.57 trillion for the week ended Wednesday, August 6, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $8.85 billion and prime funds increased by $700 million. Tax-exempt money market funds increased by $3.23 billion." Prime Institutional MMFs fell by $5.7 billion to $882.9 billion (34.4% of total assets) according to ICI's data for the week ended 8/6/14

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