February 25, 2021

Hopeful, but Wary at Money Markets

In search of safer havens, investors have flocked to newer investments like federally guaranteed, zero-interest checking accounts. Fund managers, in turn, have increased cash levels and shifted their portfolios to hold even more investments that can be easily sold to meet investor withdrawals.

Congress was working around the clock over the weekend to raise the debt ceiling by Tuesday, reaching a framework agreement late Sunday. But even a short-term Congressional deal will leave some uncertainty for money market investors.

One credit rating agency has held out the possibility that it would downgrade in the nation’s credit rating even with a debt deal in place. Such a move would probably send even more investors toward the exits, fearful that fund managers will have to decide whether to sell off other holdings whose value could be affected by lower ratings.

But the greatest fear for a fund manager is that a fund “breaks the buck” — that its share value falls below the stable $1-a-share price that money funds maintain. That happened in 2008, when the asset value of the Reserve Primary fund fell to 97 cents a share because of its large holdings of the debt of Lehman Brothers, which went bankrupt.

To break the buck, its value must fall by one-half of 1 percent, to 99.5 cents a share. Since Treasury bond prices move inversely with interest rates, if the market attaches greater risk to owning Treasuries, their interest rates would rise and prices would fall to attract buyers. A steep swing in rates and prices could cause the value of a money market fund to sink below the $1 level.

Chris Plantier, a senior economist at the Investment Company Institute, a mutual fund trade group, and Sean Collins, a senior director of industry and financial analysis, said last week that their models showed that it would take a 3 percentage point rise in short-term interest rates, affecting every security in a money market fund’s portfolio, to drive a fund’s value down to 99.5 cents a share.

With short-term rates currently near zero, a jump of 3 percentage points would be such a catastrophic event that money funds might be the least of investors’ problems. It’s so inconceivable that rates for consumers and businesses could jump that far that fast that it evokes dire images of people in bread lines.

More likely, managers say, is that a downgrade of Treasury bond ratings would push short-term rates up by one-quarter to three-quarters of a point, leaving the net asset value of money funds safely at $1 a share.

Over all, though, fund managers and regulators were optimistic that money market funds would be relatively untouched by further market turmoil.

“We’ve had a contingency team focused on this since the end of May,” Robert Brown, president of money markets at Fidelity Investments, the nation’s largest manager of money market funds, said Friday. “We have to be prepared to respond to the unthinkable.”

Fidelity has $440 billion in money market fund assets.

Federal regulators, too, say they believe that investors have seen what is possible — unlike in 2008, when Lehman Brothers went bankrupt over a weekend.

“I don’t believe the Treasury markets are going to freeze up,” said one federal regulator, who spoke on the condition of anonymity because he feared the knowledge that regulators were watching might cause undue concern about a market segment. “The funds we have talked to are well positioned to substantially handle the kinds of outflows that they have seen recently.”

Money funds must hold only highly rated, short-term assets, but government securities are exempt from the requirement. So a ratings downgrade would not automatically force fund managers to sell Treasuries.

The greater danger is to money funds with extensive holdings of short-term corporate i.o.u.’s, or commercial paper. Any issuer that enjoys a high credit rating because of implicit or explicit support from the government could be subject to downgrades if the government’s rating fell.

Those include Fannie Mae, one of the big government mortgage companies, whose debts are guaranteed by Washington but which would likely be downgraded as well, and some of the largest banks, which might enjoy an implicit belief that the government would bail them out in a financial crisis, as it did in 2008.

Regulations after 2008 require taxable money market funds to hold 10 percent of their assets in a form that can be converted to cash in a single day, and all funds to hold 30 percent of assets in a form that can be converted to cash within five days.

According to one market analyst, iMoneyNet, many funds have gone beyond that. On June 30, the company said, the average government money market fund had 58 percent of its assets in securities that would mature within five days.

Even so, the next-to-nothing interest rates that most money market funds are currently earning have been judged by many investors not to be worth the risk. A little-noticed portion of the Dodd-Frank Act, passed in the wake of the financial crisis, provides federal insurance through the end of 2012 for unlimited amounts of deposits in noninterest-bearing checking accounts.

That has led to a sharp upswing in the assets in bank checking accounts, to $2.4 trillion at the end of last year from $2.1 trillion at the end of 2009.

So far, it doesn’t seem to have worried investors that the government that is promising to make interest payments on Treasuries is the same government insuring those checking accounts. Insurance on bank accounts is covered by the Federal Deposit Insurance Corporation.

Article source: http://feeds.nytimes.com/click.phdo?i=04771de64edc271ff34896ec6201297f

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