US money market funds are struggling with short-term interest rates near negative territory

A section of the US financial industry that saves $ 4 per cent for individuals and businesses. savings, has become extremely tense as US markets flirt with negative interest rates.

Money market investments in short-term government debt have taken hundreds of billions of dollars in new money from savers in recent months. But there is strong competition to use the declining stock of low-risk assets that generate positive returns.

The result was a squeeze that reduced yields below zero, making most of the industry unprofitable, and challenging the Federal Reserve, which analysts say should weigh US interest rates in order to keep interest rates positive.

“If the government’s money market funds are to continue to invest below zero, the industry’s economics are ‘deteriorating,'” said Christopher Tufts, JPMorgan Asset Management’s global head of business portfolio management. “I would not be surprised if the funds start to restrict investors’ subscriptions or approach it completely [money]»

“Of course, this is not a good place to work in this hot time,” said Deborah Cunningham, chief investment officer of global liquidity markets at Federated Hermes, one of the world’s largest money market fund managers. “It really has no value anywhere.”

Short-term interest rates have fallen sharply in recent weeks as more cash flowed into the financial system.

There has been a steady drop from the Fed, which buys $ 120 billion worth of treasury bills every month. The Treasury Department has complicated the situation by providing funding for the Biden administration’s stimulus package adopted in March.

At the same time, the Treasury has also reduced its stock of short-term bills in circulation as part of its efforts to extend the government’s debt repayment period.

In some cases, investors actually had to pay for a US government loan because recent treasury bonds, which matured within a month, were below zero. The rate at which investors in the repo market exchange treasuries and other high-quality collateral in the repo market, another major source of income for money market funds, has also sometimes been negative.

Peter Crane, publisher of Crane Data, estimates that the average seven-day yield on high-end money market funds now fluctuates around 0.02 percent, well below the 1.39 percent level seen in 2019. at the end. Many money market participants have turned down payments to investors, believing that they will boost their profitability.

Despite the small income, according to the State Investment Company, the assets of government funds in the dram market inflated to $ 4t for the first time in the week ending May 26.

Some of these entries come from: banks: which urge large corporate clients to direct cash to money market funds rather than investing it in their accounts. U.S. bank executives say they are struggling to use the cash in their deposit accounts, which encourages stricter capital requirements that they are more likely to avoid.

Money chart at the Fed reverse repo facility, $ bn, showing that money market assets are becoming a

Money market fund managers, who have some good investment options, are more likely to turn to the Fed, which offers selected banks և investment groups a chance to find cash through its reverse repo program (RRP) with a zero interest rate.

A record $ 485.3 billion According to Doug Spratly, head of cash management at T Rowe Price, it has become “important” for the industry last week.

“If we need a mortgage for the day, we get negative interest rates from the street or even zero rates from the street, then we will go to the FD and consider it the right trade of the day,” said Hermes Cunningham of the Federal Republic of Germany. “When others reach higher prices, the Fed has zero value.”

The Fed itself is under pressure to intervene in short-term markets. Its benchmark interest rate, the federal funds rate, has fallen, along with other short-term interest rates, and is now below the 0.25 percent target below zero percent. According to the New York branch of the Central Bank, it recently fell by 0.01 percentage points to 0.05 percent, a level that, according to many strategists, can force FD to act,

Richard Mejzak, BlackRock Group’s Global Portfolio Management Officer, expects both the RRP interest rate and the Fed to raise interest rates, which hold reserves at the Central Bank, perhaps at this month’s next monetary policy meeting.

Without some help, the “longevity” of the money industry could be in jeopardy, warns Mark Cabana, Bank of America’s interest rate strategist.

“The funds have already refused payments, they earn almost zero,” he said. “There are questions about how long the funds can remain viable as unprofitable organizations.”

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