Daily Management Review

In Weeks there can be a $300 Billion Exodus From Money Markets


09/14/2016




In Weeks there can be a $300 Billion Exodus From Money Markets
Money managers are bracing for a last-minute exodus of as much as $300 billion from funds in regulators’ cross hairs with a seismic overhaul of the $2.6 trillion money-market industry weeks away from kicking in.
 
At the center of the upheaval are prime funds which seek higher yields by buying securities like commercial paper. Investment Company Institute data show that their assets have touched $789 billion and have already plunged by almost $700 billion since the start of 2015. The outflow has shattered demand for banks’ and other companies’ short-term debt and raising their funding costs and rippled across financial markets.
 
A result of regulators’ efforts to make the financial system safer in the aftermath of the credit crisis is the transformation of the money-fund industry, where investors turn to park cash. Institutional prime and tax exempt funds will have to end an over-30-year tradition of fixing shares at $1 as the new rule kick starts on Oct. 14. Only those fund that hold only government debt will be able to maintain that level.
 
Preparations are on in case investors yank more money, as the new era approaches, by companies such as Federated Investors Inc. and Fidelity Investments. Such companies have already reduced or altered prime offerings.
 
“All managers, like ourselves, are positioning around the uncertainty of the exact magnitude of the outflows,” said Peter Yi, director of short-term fixed income at Chicago-based Northern Trust Corp., which manages $906 billion.
 
TD Securities predicted in a Sept. 7 note that the additional outflow from prime-fund investors may tally as much as $300 billion, Yi sees it potentially reaching $200 billion in the next 30 days.
 
Avoiding short-term debt that matures beyond September and shortening his funds’ weighted average maturity are the ways Yi is preparing. And he’s not alone. The weighted average maturity of holdings fell to an unprecedented 10 days as of Sept. 12 for the biggest institutional prime funds tracked by Crane Data LLC. It’s not just floating net-asset values that investors are avoiding. Restrictions such as redemption fees can also be imposed by prime funds.
 
Since most of the cash leaving prime and tax-exempt funds has streamed into less risky offerings focusing on Treasuries and other government-related debt, such as agency securities and repurchase agreements, money-fund assets have held steady amid the tumult. The new rule, which the U.S. Securities and Exchange Commission had issued in 2014, has exempted these funds.
 
There’s less money flowing into commercial paper and certificates of deposit, which banks depend on for funding and this is a major repercussion of the flight from prime funds. This has resulted in the soaring of banks’ unsecured lending rates like the dollar London interbank offered rate. Three-month Libor reached about 0.86 percent Tuesday, the highest since 2009.
 
Seth Roman, who helps oversee five funds with a combined $3.2 billion at Pioneer Investments in Boston said that although the risk of a Federal Reserve interest-rate hike by year-end will keep Libor elevated, it may stabilize after mid-October because prime funds may begin to increase purchases of bank IOUs.
 
“You could picture a scenario where Libor ticks down a bit,” Roman said. But “you have to keep in mind that the Fed is in play still,” Roman said.
 
(Source:www.bloomberg.com) 






Science & Technology

Australian Research Success Could Mean Shatterproof Cell Phones Could Soon Be A Realityv

Top ten hi-tech events of the year

Tesla Considering Designing And Developing AI Chips On Its Own To Support Its Auto-Pilot Project

Verizon to introduce 5G in five American cities in 2018

Airbus, Rolls-Royce, Siemens to create an electric aircraft

Study Finds Treatment Efficacy Could Be Sacrificed For Reduced Side Effects In Cancer Therapies By Patients

Some Information About Their Self-Driving Car Research Has Been Disclosed By Apple Scientists For The First Time

A Massive Data Breach Was Covered Up By Uber By Paying Up Hackers

A City Is Can Be Converted To A Living Organism, Showcases China’s Huawei

Workers Would Be Helped To Lift More By These Robotic Vests

World Politics

World & Politics

Phase Two Of Brexit Talks, Announced On Friday, Would Be Tough, Analysts Say

Elections in Italy: the last chance of Eurosceptics?

15 countries with the highest level of organized crime

Athens agreed with international lenders

EU Pressure Reportedly Forces UK To Bow Down, Could Agree To Pay £50bn For Brexit Divorce

$1 Billion Is The Price For Freedom For Arrested Saudi Prince In Corruption Crackdown: Reports

U.S. Capital Washington Appears To Be In Range Of The Latest Missile Launched By North Korea

Ten biggest fears of millennials