Money market funds (MMFs) don’t sport hefty yields, but the asset class has long been a favored destination for investors looking to conservatively position and ride out rocky equity markets.
Still, money market funds are facing regulatory scrutiny, both in the U.S. and the European Union, after the coronavirus market swoon of March 2020 forced a swift rush to quality cash assets.
“US and EU regulators plan to adjust money market fund rules after coronavirus-related market turmoil caused an extreme flight to quality in March 2020, putting prime MMF liquidity under pressure, and triggering a drop in fund valuation,” notes Moody’s Investors Service.
MMFs typically hold short-term bonds with maturities of 30 to 90 days and are designed to guard investors’ capital with essentially no downside risk. They have par values of $1, which usually isn’t threatened, but the buck was broken in 2008 during the global financial crisis, prompting fresh regulatory oversight.
That scenario isn’t be replayed today, but there are MMF issues for investors to ponder.
“Research by US Federal Reserve Board economists shows that in March 2020, some investors in prime MMFs exited long before any breach of liquidity thresholds that might have triggered redemption restrictions,” adds Moody’s. “There is also evidence that MMFs sold less liquid assets to meet redemption requests so as to protect their weekly liquidity thresholds, aggravating market-wide liquidity shortages.”
Where to Turn
Investors looking for alternatives to traditional money market vehicles can find comfort in short-term fixed income ETFs, such as the SPDR Barclays 1-3 Month T-Bill (BIL ).
“BIL seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index. As such, it’s among the ETFs that share the MMF objective of providing liquidity to capital through short duration high quality investments,” according to State Street Global Advisors (SSGA).
BIL could prove to be a preferred option for MMF investors looking to skirt regulatory headwinds and it appears those will linger.
“In February, the Securities and Exchange Commission published ten reform proposals for public comment,” notes Moody’s. “One of these is to remove the link between breaches of liquidity thresholds and the imposition of withdrawal restrictions. This would help reduce the risk of pre-emptive redemptions, and make it easier for prime and tax-exempt MMFs to deploy their liquid assets in periods of market stress, a credit positive.”
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