Money-market funds flock to guarantee program
Nearly all the $3.4 trillion in money-market mutual funds is expected to be federally guaranteed for at least the next three months, now that all the major fund providers signed up to participate by a deadline that passed Wednesday.
The universal participation means investors won’t have to stay up at night worrying whether their fund family is taking part.
But the protection comes at a cost, with the higher fees that investors will pay for federal guarantees slightly eroding the already-modest yield that money-market mutual funds generate.
And beware of shifting money from one fund to another. The guarantees apply only to assets held in funds as of Sept. 19, so new share purchases since that date aren’t covered, including instances in which an investor pulls money from one fund and puts it in another.
But even those new, uncovered investments “are much safer than they were before the guarantee program,” said Peter Crane, president of Crane Data, publisher of the money-market fund newsletter, Money Fund Intelligence.
That’s because the vast majority of investors’ money currently in any fund also was held there at the Sept. 19 cutoff, and is consequently covered.
In case any fund takes a hit from a soured investment, the guarantees are expected to eliminate motivation for investors to hurriedly pull out money — and thus prevent fund managers from having to quickly sell assets at a loss, jeopardizing their ability to cover every dollar invested in the fund.
“It’s not the blowup from a single investment that kills you; it’s the resulting run on the fund’s money that kills you,” Crane said.
Fund management companies had until Wednesday to sign up for a guarantee program that the Treasury Department announced Sept. 19, three days after the value of the Reserve Primary Fund’s assets fell below the dollar-for-dollar level. The episode of “breaking the buck” led institutional investors to pull out cash from that fund and others, and flee funds investing in corporate debt in favor of those holding safer government IOUs.
Treasury Department spokeswoman Jennifer Zuccarelli declined to specify how many firms applied for guarantees by Wednesday’s deadline, but she said, “We have seen significant interest.”
Through Wednesday, the agency reported receiving $337 million from funds paying upfront fees to participate. For the vast majority of eligible funds, the fee is one “basis point,” or $1 for each $10,000 in fund assets.
Based on that fee level and the $337 million in fees paid, applications have been filed to cover virtually all the $3.4 trillion in money fund assets. And Crane, of Crane Data, said each of the 90 money fund managers his firm tracks reported filing applications as of Wednesday, though some of those firms did not seek guarantees for funds that invest in ultra-safe Treasury bills.
Some funds that applied may not be eligible, since funds must maintain asset values of at least 99.5 cents per each dollar invested to participate. For example, Reserve Management Corp. said Thursday that it had applied for guarantees to cover the Reserve Primary Fund and other funds it manages. But when it broke the buck, Reserve Primary Fund reported its assets stood at 97 cents for each investor dollar, below the Treasury Department’s 99.5 cent coverage threshold.
The fees to cover the guarantees are assessed directly to each fund, meaning investors ultimately pay the costs, and consequently see a slightly smaller return than they otherwise would see.
“Whether it’s explicit or not, you’ll pay for it somehow,” Crane said.
Lance Pan, a research director at Newton, Mass.-based Capital Advisors Group, said he’s been advising his firm’s institutional investors to be cautious in pulling money out of a money-market fund and putting it into another money fund. In recent weeks, many institutional firms have redeemed cash from funds investing in corporate debt and shifted it to safer government debt — moves that eliminate the federal guarantee if the shift occurs after Treasury’s Sept. 19 cutoff.
“We’re saying that is the wrong move,” Pan said, even if the money is shifted from one fund to another fund run by the same firm.
The guarantees are offered via the government’s $50 billion Exchange Stabilization Fund, extending protection similar to FDIC insurance for bank savings deposits.
For now, the guarantees extend only three months. After that, the Treasury Department will consider market conditions before deciding whether to end or renew.
By MARK JEWELL