As the unprecedented trillion-dollar shift of assets from Prime to Government money market funds approaches its final crescendo, we review the latest and perhaps final batch of Prime to Government funds conversions. Nationwide, Northern, Oppenheimer, PFM, PIMCO, and Columbia have all converted funds in recent days, bringing the total Prime-to-Govie conversion tally to almost 350 billion, over one-third of the 1.0 trillion that has shifted out of Prime overall. We review some of these latest moves below, and we also excerpt from Federal Reserve Vice Chairman Stanley Fischer's speech yesterday on "Low Interest Rates."
Columbia's filing explains, "In connection with amendments to the rules that govern money market funds, the Board of Trustees of the Fund approved changes to the Fund’s name and investment policies to allow the Fund to qualify and operate as a government money market fund effective on or about October 1, 2016 (the Effective Date). Accordingly, on the Effective Date the Fund's name will change to Columbia Government Money Market Fund and all references in the prospectus to Columbia Money Market Fund are deleted and replaced with Columbia Government Money Market Fund."
Nationwide Money Market Fund's filing says, "Effective September 30, 2016: The Nationwide Money Market Fund (the "Fund") is renamed the "Nationwide Government Money Market Fund." All references in the Prospectus to the Fund are updated accordingly.... The information under the heading "Principal Investment Strategies" on page 39 of the Prospectus is deleted in its entirety and replaced with the following: The Fund seeks to maintain a stable price of $1.00 per share by using the amortized cost method of valuation to value portfolio securities. The Fund invests primarily in a portfolio of U.S. government securities and repurchase agreements that are collateralized fully by cash or U.S. government securities, and which mature in 397 calendar days or less."
Northern Diversified Assets' (now Northern Govt Assets Portfolio's) filing explains, "At a meeting held on May 26, 2016, the Board of Trustees of the Northern Institutional Funds approved the conversion of the Diversified Assets Portfolio (the "Portfolio") to a "government money market fund" as defined under Rule 2a-7 of the Investment Company Act of 1940, as amended. The conversion, and the changes described below, will become effective on or about September 30, 2016." (Northern is also liquidating its Tax Exempt Portfolio and its California Municipal Money Market Fund this week.)
The PFM Prospectus Supplement adds, "Effective October 3, 2016, Prime Series will operate as a government money market fund and will have a policy of investing at least 99.5% of its assets in cash, U.S. government securities (including securities issued or guaranteed by the U.S. government or its agencies or instrumentalities) and/or repurchase agreements that are collateralized fully. This change in the investment program of Prime Series will allow Prime Series to continue to seek to maintain a stable net asset value of $1.00 per share after certain new requirements applicable to money market funds and adopted by the Securities and Exchange Commission become effective. In view of this new investment policy, the name of Prime Series will be changed to "Government Select Series" effective October 3, 2016."
The Federal Reserve Bank of New York has also made some revisions to its "Reverse Repo Counterparties List." It explains, "To prepare for the potential need to conduct large-scale reverse repurchase agreement transactions, the Federal Reserve Bank of New York is developing arrangements with an expanded set of counterparties with whom it can conduct these transactions. These counterparties are in addition to the existing set of Primary Dealer counterparties with whom the Federal Reserve can already conduct reverse repurchase agreements."
Among the latest "Name Changes," they say, "PFM Funds - Prime Series changed its name to PFM Funds Government Select Series, effective October 3," and among "Additions and Removals," they add, "Dreyfus Institutional Cash Advantage Fund merged into Dreyfus Institutional Preferred Money Market Fund, effective October 5."
Fed Vice Chair Fischer says in his recent speech, "I will talk today about an issue that currently confronts almost all central banks: historically low interest rates. Indeed--as shown in figure 1--in an increasing number of countries, they have even dipped below zero. Ultralow interest rates have not been limited to the short end of the yield curve, which is most directly affected by monetary policy. Figure 2 shows that longer-term interest rates--which embed market participants' expectations of where real short-term rates and inflation are likely to be in the future--have also been exceptionally low."
He continues, "In John Maynard Keynes's General Theory, this contrast between equilibrium and actual interest rates was at the heart of the so-called liquidity trap, a situation where the equilibrium interest rate is so low that even a zero (or slightly negative) nominal interest rate is not low enough to stimulate economic activity. Keynes's bottom line was that, when the economy falls into the liquidity trap, traditional monetary policy loses its effectiveness and fiscal policy has to be used for countercyclical stabilization. And here lies the first reason why we should be concerned about chronically low interest rates: When the equilibrium interest rate is very low, the economy is more likely to fall into the liquidity trap; it becomes more vulnerable to adverse shocks that might render conventional monetary policy ineffective."
Fischer continues, "Let me briefly mention a second reason for worrying about ultralow interest rates: The transition to a world with a very low natural rate of interest may hurt financial stability by causing investors to reach for yield, and some financial institutions will find it harder to be profitable. On the whole, however, the evidence to date does not point to notable risks to financial stability stemming from ultralow interest rates. For instance, the financial sector has appeared resilient to recent episodes of market stress, supported by strong capital and liquidity positions."
Finally, he adds, "Thus, both increased saving and reduced investment have potentially driven the sizable decline in the natural rate of interest. If some of the forces behind these shifts prove to be quite persistent, then we could be stuck in a new longer-run equilibrium characterized by sluggish growth and recurrent reliance on unconventional monetary policy. Nonetheless, there is a silver lining. Monetary and fiscal policies could ameliorate some, though not all, of the potential causes of ultralow rates--such as excessive precautionary saving and weak demand for physical capital. In other words, ultralow interest rates are not necessarily here to stay, especially if the right policies are put in place to address at least some of their root causes."
