Talk about terrible timing. New rules from the Securities & Exchange Commission that require money market funds to hold at least 10% of their assets in cash or in highly liquid investments such as U.S Treasuries that can be converted to cash in one day will reduce already miniscule returns from these funds.
Another rule requires funds to hold at least 30% of their assets in cash, in Treasuries, in other government securities with remaining maturities of 60 days or less, or in other securities that can be converted into cash in a week or less.
A third rule reduces the limit on the percentage of illiquid securities that a fund may hold to 5% from 10% and defines illiquid as any security that cannot be sold within seven days at its carrying value.
All in all the new rules will reduce money market fund yields that are now barely above 0%. The highest seven-day yield I could find for a money market fund on Friday May 28 was just 0.14%.
But the biggest effect of the new rules, which went into force on May 28, may be on the ability of troubled banks to raise money in the short-term commercial paper market.
Money market funds are, in normal times, big buyers of the short-term debt that banks use to fund their loans. With money market funds now required to hold more of their assets in safe debt that will reduce the demand for any bank debt that comes with the slightest whiff of risk even further. And it’s not like these funds were rushing to load up on risky paper before the rules went into force.
The effect will be to raise demand and bid up prices for commercial paper from solid banks—which will reduce the cost of funding for these banks and reduce the yield that money market funds get from holding this debt—and to force down the prices of commercial paper from risky banks—which will increase the cost of funding for these banks or shut them out of the short-term debt market completely.
The rules are intended to head off any run on a money market fund in the event of another financial crisis.
Money market funds currently hold $2.8 trillion in assets. That’s well below their peak assets of $3.8 trillion in January 2009. Money market fund assets were last this low in September 2007.
Have to agree with TBoone above.
dgoedken
I read the new rules the same way… gotta make someone buy treasuries when everyone else won’t.
ddldmd,
I don’t think glass comes in bullion. 🙂
(Sorry, I couldn’t resist.)
Bobisgreen: Maybe buy the companies that make the equipment used to mine the sand to make the glass that makes the jars. Or better yet just buy bullion?
Jim,
That’s all the SEC knows (terrible timing). They feel “something” has to be implemented to make it seem like they’re doing their jobs (cough).
TBoone,
“Regardless of other consequences”? Forgive the sarcasm; your answer makes as much sense as their regulation. It seems the case that solutions aren’t well thought out, well timed, or cultured to effect a meaningful, managed and positive outcome.
Ed,
Perhaps a page from jim’s book…buy the companies that mine the sand that makes the glass for the mason jar.
I look at it as them forcing someone to buy Treasuries. I guess is China and other countries don’t (won’t) buy as many Treasuries in the future b/c we’ve collectively spent our future incomes for decades…that “someone” are the Money Market owners.
It would also server to “punish” the risky banks by causing them to pay more for that money, letting the ‘invisible hand of the mkt’ pushes ppl’s assets away from those riskier banks. It’d also server the purpose of having as a heads-up to the gov’t if the bank shows patterns of having to come to them for loans or what have you.
…that’s just my POV
As an unfortunate investor in the old Reserve MM Fund (which, if you recall “broke the buck”), I am completely supportive of any measure that protects principal in a MM fund. Regardless of other consequences.
The big questions: When does the SEC expect the next financial crisis to be? And why do they anticipate a run on money market accounts?
I don’t suppose anyone would know any good mason jar manufacturer stocks?