“Government securities will be in high demand, depressing the yields there, and the demand for credit instruments will be smaller,” said Peter Yi, Chicago-based director of short-term fixed income at Northern Trust Corp., which manages $875 billion. “As that happens, we’re forecasting spreads between commercial paper rates and government securities to widen.”
The SEC joined the Fed and the Treasury Department in moving to buttress money funds following the collapse of the $62.5 billion Reserve Primary Fund after bets on Lehman Brothers Holdings Inc. debt soured. The fund’s failure triggered a run on other money funds and brought the market for commercial paper, worth $1.76 trillion at the time, to a standstill. The market has since shrunk to about $1.1 trillion, with U.S. money funds holding about $380 billion, Crane data show.
The new regulations give investors a bundle of incentives to dump prime funds. In addition to forcing institutional prime funds’ net asset values to float daily based on underlying holdings, the rules will also allow the funds -- for both retail and institutional holders -- to take steps such as temporary fees on withdrawals to reduce runs.
The commercial paper market may shrivel by an additional 15 percent, according to Abate at Barclays.
He had originally expected the migration of money to take place next quarter. But with global financial-market turmoil sparking concern over the health of banks and traders trimming bets on Fed rate increases, investors may have little reason to wait, he said.
“The market is going to contract and yields are going to get higher," he said.