Barron's Reviews Money Fund Turmoil
Barron's published the article, "Why Your Money-Market Fund Isn't as Safe as You Think." It opines, "No one wants their money-market funds to be interesting. They are the cash-like income funds you buy when you're waiting to buy something else, with a $1 share price that you always want to stay $1. Unfortunately, during the coronavirus crisis, money funds became interesting. From March 2 to March 23, the assets under management of prime money-market funds, which buy high-quality corporate debt, dropped by $120 billion -- 15% of prime funds' assets at the time. To prevent a stampede like in the 2008 financial crisis, the Federal Reserve established the Money Market Mutual Fund Liquidity Facility, or MMLF, on March 18 to provide loans to banks to purchase money funds' underlying securities, thereby improving their liquidity. Given the crisis, it's time people stop thinking of money funds as risk-free." The piece explains, "While the last fund to break the buck was 2008's Reserve Primary, liquidity in 2020 proved a greater problem, ironically because of regulations the SEC created in 2014 as a result of the Reserve fund debacle. After the financial crisis, the SEC issued two rounds of reforms: The first, in 2010, tackled liquidity, mandating that a larger portion of the securities a fund owns must be easily sold. The second, in 2014, separated money-market funds into two categories -- retail funds, which were allowed to keep the $1 per share value so long as they held only government-issued securities, and institutional prime money-market funds, which have a floating NAV." They quote Wells Fargo Asset Management's Jeff Weaver, "As a manager of a prime money-market fund, you must maintain 30% in liquid assets, which are predominantly assets that mature within seven days and Treasury bills. If you drop below that 30%, then the [fund's] board of directors must consider fees and gates." Barron's adds, "Currently, the average fund in the Crane 100 Money Fund Index of the 100 largest taxable money funds yields only 0.12%. And that minuscule payout is only possible by money funds waiving part of their fees. 'About half of all money funds currently yield 0.01%,' says Peter Crane, president of money fund tracker Crane Data. 'And those are the ones that are waiving the most fees. They account for about a third of all money fund assets -- your smaller, higher-expense funds.' Total U.S. money-market fund assets were $5.2 trillion at the end of May. Such waivers can be costly even for the lowest-fee managers."
