Widening U.S. money fund spread sets stage for $400 billion shift

Thu May 19, 2016 5:08pm EDT
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By Ross Kerber

BOSTON (Reuters) - The difference in yield between prime and government money market funds has widened by 6 basis points since January, according to data released on Wednesday, in a trend expected to accelerate as investors prepare for new rules being rolled out this autumn.

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 government 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.   Continued...

An employee of a bank counts US dollar notes at a branch in Hanoi, Vietnam May 16, 2016. REUTERS/Kham