NEW YORK – Some money managers are trying out social distancing of the financial kind. Fidelity Investments on Tuesday closed off three short-term U.S. government debt funds to new investors. It’s a market that has ballooned 42% so far this year to more than $1.1 trillion, according to data from the Investment Company Institute. Trouble is, high demand for Treasuries that mature in a year or less had started pushing yields into the red. Luckily for the industry, the $2.2 trillion U.S. stimulus package should yank them back.
The prospect of so-called negative yields on money-market vehicles does not hold the same potential for systemic calamity as when funds’ asset values drop below par – or break the buck, as it’s called. That’s a function of spiraling credit risk. Funds that invest solely in U.S. short-term U.S. government debt don’t have that worry, being instead a safe haven from such woes. But with interest rates effectively at zero, and fund managers at times buying paper from dealers for a tad less than face value, the returns on money-market funds become wafer-thin and over time could even go into the red.
There are ways the funds’ managers can try to avoid this. So far it’s paper with maturities of six months or less that dipped into negative territory. Managers could load up on nine- or 12-month Treasury bills – though that has limited use as the point of these funds is to provide liquidity, which means they do need to hold shorter-term paper, too. Or they could buy, say, nine-month bills that are due in a month, though done on any scale that would quickly push yields down, as well.
That’s why the next option is to close funds to new money and thus limit how much cash needs to find a new home. If that doesn’t do the trick, managers would probably cut or eliminate their fees. That’s what a number of funds did for a year or two after the 2008 financial crisis.
The stimulus package may render that moot. The Treasury Department is likely to issue Treasury bills to raise around 60% of the money it needs to support the economy, Goldman Sachs analysts reckon. This week alone the agency sold $319 billion-worth of bills, 70% higher than the record set 12 years ago. Throw in other needs like delayed tax receipts and April and May’s net issuance could easily hit $1.2 trillion, Goldman estimates.
That ought to help stave off money-market negativity for now. But the anxieties among money-fund managers are an example of how an attempt to fix one wobble in the market can threaten to create another.
– The U.S. Treasury Department sold a record $319 billion of debt that matures in a year or less in the week starting March 30. The previous record, of $190 billion, was set in October 2008.
– The amount now sitting in money-market funds that invest solely in short-term U.S. government debt and repos has increased 42% since the end of 2019 to more than $1.1 trillion, according to data released on April 2 by the Investment Company Institute.
– Fidelity Investments said in a statement on March 31 that it was closing three Treasury money-market funds to new investors to protect their “ability to deliver positive net yields to shareholders.” Between them the funds managed more than $85 billion as of March 30.
© Reuters News 2020