“You could picture a scenario where Libor ticks down a bit,” Roman said. But “you have to keep in mind that the Fed is in play still.”
Financial firms paying higher rates to attract investors to their IOUs will push three-month Libor to about 0.95 percent by the end of September, according to JPMorgan Chase & Co.
Although bank funding costs are rising, it isn’t a signal of financial strain as in 2008, said Jerome Schneider, head of short-term portfolio management at Newport Beach, California-based Pacific Investment Management Co., which oversees about $1.5 trillion.
“This is not a credit stress event, it’s a credit repricing due to systemic and structural changes,” he said.
The market for commercial paper has shrunk about 50 percent from its $2.2 trillion peak in 2007, pushing financial firms to diversify funding sources -- choosing longer-term debt and loans in foreign currencies.
At least $269 billion in commercial paper and certificates of deposits held by prime funds will come due before Oct. 14 and most issuers of that debt will need to find financing outside the money-fund industry, JPMorgan predicts.
The hubbub in money markets has its roots in a crucial episode of the financial crisis -- the demise of the $62.5 billion Reserve Fund, which became just the second money fund to lose money, or “break the buck.” The event contributed to the global freeze in credit markets and pushed the Treasury Department to temporarily backstop almost all U.S. money funds.
With the Fed’s target rate still not far from zero, money-fund investors looking to pad returns may overcome their aversion to prime funds. Institutional prime funds’ seven-day yield was 0.24 percent as of Sept. 12, compared with 0.17 percent for government funds, according to Crane Data.
“You’ll see the prime-fund space continue to shrink until we hit mid-October,” said Tracy Hopkins, chief operating officer in New York at BNY Mellon Cash Investment Strategies, a division of Dreyfus Corp.
“After that,” she said, “I would not be surprised to see assets return, once customers get accustomed to the floating NAVs and want to earn incremental yield over government money-market funds.”
This article was provided by Bloomberg News.