The rules shocked muni money fund managers. The historical average for seven-day liquidity has been between 70 percent and 80 percent for decades, said Mary Jo Ochson, who oversees $14.7 billion in tax-exempt money funds at Pittsburgh-based Federated Investors Inc. The funds, which invest in highly rated short-term debt, remained liquid during the financial crisis, she said.
“You don’t have a liquidity situation in these funds, they’re extremely high quality,” Ochson said. In the financial crisis “they did exactly what a cash vehicle should do, but are being hit very hard.”
The SEC said tax-exempt money market funds have greater credit and liquidity risks than government funds.
Municipal money market funds managed $179.4 billion as of July 27, a 26 percent decline since the beginning of the year, according to Lipper U.S. Fund Flows data. In 2008 they had more than $500 billion.
Colleen Meehan, who manages about $6 billion of muni money market funds at Dreyfus Corp., said investors are balking at the prospect of liquidity fees and redemption gates. In June, UBS Asset Management said it would transfer money in its tax-exempt sweep funds to a government money fund.
Rate Environment
“It’s a lot easier for people to just move out of these other products into government-only funds until they address what their concerns are” from both a compliance and systems standpoint, Meehan said.
The Fed’s zero-interest rate policy hasn’t helped.
Between Oct. 21, 2015, and March 2, 2016, the yield on short-term municipal bonds was 0.01 percent. The average yield over the past seven years is 0.15 percent.
“Tax exemptions don’t help you if there’s no income to tax,” said Crane.