Goldman Sachs Asset Management published recent commentary entitled, "Rule Changes Likely to Spur Large Rotation Out of Prime Money Market Funds and Front-End Credit." It says, "Changes to the rules governing US money market funds (MMFs) have significant implications for Prime MMFs, or funds that invest in corporate bonds, primarily via short-term debt known as commercial paper. While we do not see a lot of opportunity at the front end of the credit curve now, we think the combination of rule changes and increased supply will put ongoing pressure on credit spreads and likely provide opportunities to capture value in coming months." It continues, "We expect that the switch to a floating NAV and the imposition of fees and gates will result in a large migration of assets out of Prime funds. The global money market industry is roughly $3.3tn in size, $2.7tn of which is in the US. Prime funds account for just over half the US total, about $1.4tn. We estimate as much as 70% of the $1.4tn [$980 billion] in Prime funds will migrate elsewhere due to uncertainty around how the transitional period will play out, along with the fact that several institutions, governments and agencies have investment policies that only allow cash to be invested in stable value instruments.... As a result, we expect significantly lower demand for front-end IG corporate credit, which is likely to cause spread widening and may stem the large issuance we've seen of late. We are already seeing signs of the market anticipating the uncertainty and volatility that is likely to accompany the rotation as demand for shorter-dated issuance has increased. At GSAM we have been conservative in our approach to investing in this environment by focusing the majority of our purchases in securities with weighted average maturities (WAMs) of three-months or less. Towards the end of 2015 and through 2016, as the deadline to implement the SEC reforms approaches, we expect elevated volatility to produce attractive relative value opportunities in front-end credit markets."
