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 Executives at big fund sponsors JPMorgan Chase & Co, Goldman Sachs
Group Inc and others expect institutional investors to move perhaps
$400 billion out of prime funds, or about half their assets, and
into government money funds in coming months. Ensuring a smooth
shift will amount to the first major test of how well U.S.
regulators have strengthened the $2.7 trillion money fund industry,
whose ultra-safe reputation was tarnished during the 2008 financial
crisis.
Clients like corporate treasurers worry that new rules could lock up
some assets during times of stress. As those investors leave prime
funds, companies such as banks that sell funds securities will have
to offer better terms, said John Tobin, head of portfolio management
for the liquidity business of JPMorgan Chase & Co's asset management
unit.
"They will be compelled to pay more to get those same trades done,"
Tobin said in a recent interview. The spread between the yields paid
by prime and government money funds could widen to close to 40 basis
points or more this summer, he said. That would also provide extra
returns for investors willing to sit tight.
"It's a great opportunity," he said.
Among funds for institutional investors, prime funds' weekly average
yield stood at 26 basis points, 17 basis points more than government
funds, iMoneyNet said on Wednesday. At the start of the year the
prime funds' yield was 15 basis points, or 11 basis points more than
prime funds. Institutional prime funds now hold $788 billion, while
institutional government funds have $938 billion, iMoneyNet said.
One of the best-known prime funds "broke the buck" in 2008 when it
was unable to maintain its traditional $1-per-share net asset value,
while others needed support from their sponsors.
Under rules passed by the U.S. Securities and Exchange Commission in
2014, starting in October institutional prime funds will allow their
net asset values to vary from $1, to condition investors to
fluctuations. The boards of nongovernment money funds will also gain
new powers to limit withdrawals in times of stress.
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Safer-seeming government funds do not face the same rules, which has
led asset managers to revamp their product lineups and has already
reduced assets in prime funds. "Prime funds are no longer the
pure-play liquidity option that they once were," said Brandon
Swensen, co-head of fixed income at RBC Global Asset Management,
which is shutting down its Prime RBC Money Market Fund.
The asset shift is not expected to cause much market disruption, according to
analysts and fund executives, thanks to actions by regulators like pushing banks
to use longer-term funding sources.
Also, Dave Fishman, head of Goldman Sachs' liquidity solutions business, said
there is less risk the new rules will push money into unregulated products
because of a new overnight repurchase facility offered by the Federal Reserve
where government funds can park cash leaving prime funds.
Deborah Cunningham, senior portfolio manager for Federated Investors, said she
plans for scenarios where the yield difference between prime and government
money funds widens to as much as 50 basis points, the most since 2009.
Even at that spread, however, many corporate treasurers will move their money,
said James Gilligan, assistant treasurer of Great Plains Energy Inc.
"Treasurers are going to sacrifice yield for security," he said.
(Editing by Matthew Lewis)
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