Bloomberg's "Money Market Reform Creates Arbitrage for Short-Term Investors" tells us, "Bond managers can earn more than half a percentage point of extra interest annualized by buying securities that money market funds are shunning now and by using derivatives to trim the risk, said Dan Dektar, chief investment officer at Amundi Smith Breeden LLC in Durham, North Carolina.... Rules that came into effect in October have dimmed demand for certain kinds of debt -- in particular, short-term debt known as commercial paper, a near $1 trillion market of securities issued by companies including banks. The regulations are designed to make the funds safer after a major manager went under during the financial crisis." The piece adds, "There are risks to such a trade, as it means exposure to the underlying credit, according to Wells Fargo Securities LLC strategist Boris Rjavinski.... In October, rules came into effect that require riskier money market funds to pass their paper losses on securities onto investors. Money market funds have historically allowed investors to buy and sell their shares at $1 apiece, which makes the funds seem safe and stable to customers. Under the new rule, if the funds are buying commercial paper and other non-government securities, they must record paper gains and losses daily on the securities they hold, and pass those gains or losses onto investors. That creates an incentive for investors in money market funds to gravitate to funds that buy only government debt."

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