Breakingviews Says ZIRP's the Limit
Reuters Breakingviews discusses money funds in its piece, "ZIRP's the limit." Regarding negative rates, they tell us, "A major concern, aside from banks, would be money market funds. These are mutual funds that hold mostly safe, short-term debt and, traditionally at least, always maintain their $1 per share net asset value while paying at least a smidgen of interest. Investors, both retail and institutional, tend to treat them as an alternative to bank deposits. Ructions in money market funds can quickly turn into a problem of confidence. When one 'broke the buck' in the wake of Lehman Brothers' collapse in 2008, investors raced for the exits -- a bit like a bank run -- forcing the Fed to intervene." They ask, "Are money market funds that significant, though? In the United States, yes. After two huge months of inflows, their assets just topped $5 trillion for the first time at the end of April, according to Crane Data's tally. The safest variety of the vehicles accounted for nearly $4 trillion, investing in securities like government paper or Treasury repurchase agreements. Repo is one area of financial markets that briefly went bonkers earlier this year." The piece adds, "Some other types of money market funds are, since 2016 reforms, detached from the purity of never 'breaking the buck.' But their assets include a lot of commercial paper, still a significant source of short-term funding for many companies. That's another linkage policymakers worry about. The Fed's coronavirus response includes backing for these funds." Finally, Breakingviews adds, "Investors expect them to hold their value. To cover their costs, they need to make a little money from their ultra-low-risk assets. That becomes increasingly hard if rates go negative. Even if fund managers were willing to forgo fees for a while, these funds could become unsustainable longer term. And if investors withdraw money or managers shut them down in a hurry, there would be a risk of knock-on damage to repo markets and corporate borrowers, among others. Don't these funds exist in Europe too? Yes, albeit in lesser amounts and slightly different forms. Negative rates haven't killed them off so it's not certain that the Fed's worries are justified. Yet the financial systems are different: Europe has a more bank-dependent lending market, for example, while America's money market funds and mountain of mortgage-backed debt are more significant factors than in Europe."
