In March, yields shot to 0.40 percentage points as investors sold shares to pay income tax bills, and new money didn’t flow back. It currently stands at 0.44 percentage points, the highest in more than seven years and 90 percent of 1-month Libor, the taxable-rate.
As a result, it costs more for states, cities, hospitals and other non-profits to borrow in the short-term market.
While fund outflows in the first quarter could be attributed to the rate environment, the money investors pulled since March has been a result of coming money market changes, said Ochson.
“We’re cheap as can be now,” she said. “Rates are attractive, liquidity is high, the funds couldn’t look any better if you tried, however you have money market regulations that have certain features that clients don’t like.”
Tax-exempt money funds won’t go the way of the dodo, an extinct flightless bird native to the island of Mauritius, but the industry will be much smaller, both Ochson and Meehan said. It will take time for investors to get more comfortable with floating net asset values and realize the probability that the funds having weekly liquid assets fall below 30 percent is very small.
“We’re going to be attractive to similar taxable products,” said Meehan. “And maybe someday we’ll be in a normal rate environment when it will really make sense.”