Monday, October 6, 2008
US money market funds shun investors - FT
US money market funds are reportedly turning away investors as the disarray in the $4,000bn (£2,264bn, €2,907bn) global industry continues to scupper efforts to unlock frozen debt markets. The unprecedented illiquidity in short-term bank financing and the commercial paper market has left money market funds wary of making new purchases amid fears they will suffer losses if jumpy investors redeem before the holdings mature. That in turn is adding to illiquidity and pushing up inter-bank lending rates. Geoffrey Bobroff, a US-based industry consultant, said some funds were turning away large investors unless they agreed to remain invested for a period of time, a practice counter to the much-vaunted same-day liquidity concept at the heart of money market funds. "[Funds] are concerned about the velocity of the money. The asset base is such that they do not want deposits unless there is certainty as to how long they will be there for," said Mr Bobroff. "They are saying 'we don't want trafficking or hot money flowing through our group that may be there three days and then go elsewhere'." Fitch Ratings said last week that "unusually high redemption activity has put pressure on the remaining liquidity reserves of some funds", forcing them to extend the average maturity of their holdings. This redemption pressure could yet wreak greater havoc. A senior figure at a major London investment house told FTfm that many funds were still holding highly illiquid assets such as mortgage-backed securities and paper issued by structured investment vehicles (SIVs) that would probably redeem at par if held to maturity, but would result in significant losses if funds were forced to sell prematurely. "There is a very high probability that these instruments will be good, but the problem is the flow," he said. "They can get away with it if they can hold money for long enough." US money market fund managers are clamouring to sign up to a $50bn Treasury-backed insurance programme that would bail out investors if a fund lost money, or "broke the buck". But Mr Bobroff said managers still needed to act conservatively because they would be forced to liquidate their funds in order to qualify for an insurance payout. Both fund managers and investors are scrambling for safety amid the fear gripping financial markets. In the US, "prime" money market funds, which invest in both corporate and government debt, have suffered net outflows since mid-September when three funds operated by Reserve Management Corporation broke the buck. However, ultra-safe government funds have seen strong inflows. Even within prime funds, managers have raised their exposure to Treasury bills at the expense of commercial paper. "There have been some moves towards holding Treasuries in prime funds and some move from prime funds to Treasury funds," said Chris Oulton, chief executive of London-based Prime Rate Capital Management. Unless this extreme aversion to risk is reversed in the near future, these trends could compound the current problems by forcing some managers out of the sector as profitability evaporates. The flight to safety has pushed yields on short-term US Treasury bills down to 60-80 basis points, while fees in the US are typically around 40 basis points for institutional funds and 60-70 points for retail funds. A swathe of management companies have dipped into their own pockets to bail out their money market funds and avoid breaking the buck in the past year, putting the finances of the sector under additional strain. "Managers are saying 'we are going to charge 40 basis points, we have got to pay our staff and we need to set aside mentally a portion for the rainy day of a bad investment selection. Is that enough premium?'" said Mr Bobroff. Mr Oulton said a liquidity facility allowing funds to post asset-backed commercial paper with the US Federal Reserve needed to be extended to vanilla commercial paper and bank certificates of deposit to breathe life into these markets. "People are issuing asset-backed paper again because the money markets know they can put them back to the central bank. "They have established a degree of secondary market activity that had evaporated. With hindsight it would have been better to have made the eligible securities wider," said Mr Oulton, who also called on the Fed to take paper from European funds.