The specter of a return to ultra-low U.S. interest rates is haunting money-market funds.
Cash is flooding into these highly liquid vehicles for investing in short-term debt for now, and the amount of assets held in taxable money-market funds this year poked back above $3 trillion for the first time in close to a decade. But there is growing disquiet among those who run and invest in them about the problems that might be caused by potential rate cuts from the Federal Reserve.
Treasury yields that veer closer to zero could prompt those with spare cash to seek out alternatives, and may also make the job of actually running the money that remains in such funds more difficult, according to investors and strategists at a conference in Boston earlier this week.
Bets on central bank easing have already dragged one-year Treasury-bill rates below 2% for the first time since early 2018, and that’s even as certain Fed officials appear to be pushing back against some of the more extreme easing scenarios -- such as a 50-basis-point reduction in July. The prospect that T-bills and other short-dated debt instruments may soon yield even less could at some point prompt a slowdown or reversal in money-fund flows.
Possible central bank easing is “not a death sentence, but it spells reduced margins and potential losses for the industry,” said Deborah Cunningham, chief investment officer of global money markets at Federated Investors in Pittsburgh. “It’s the fear of the unknown. Is it 50 basis points? Is it a program that takes us back to zero?”
The market has been here before. When the Fed lowered its policy target rate toward zero at the end of 2008, the amount of assets in taxable money funds was more than $3 trillion. Cash peaked at around $3.4 trillion in March 2009 and then proceed to drop by more than $1 trillion, bottoming out around the middle of 2012.
If the Fed does ease, prime retail funds are most vulnerable to outflows, according to Mark Cabana, head of U.S. interest-rate strategy at Bank of America Corp. That’s because money funds “will be seen as less desirable” amid a re-steepening of the Treasury yield curve, he said during a panel discussion at the Crane’s Money Fund Symposium.
Alex Roever, JPMorgan Chase & Co.’s head of U.S. rates strategy, said that money funds have historically tended to suffer from outflows around one-to-two years after Fed reductions, and the low overall level of rates plays a greater role in driving that than the actual process of easing.
Of course, the problem of low yields is just one of the many challenges facing the short-end of the U.S. interest-rate market. While that topic dominated discussion at this year’s Crane’s conference, attendees also grappled with issues ranging from America’s debt ceiling to the Secured Overnight Financing Rate and sponsored repurchase agreements. Here’s a brief rundown on some of these issues:
SOFR Debt