PrefBlog

I would have thought it axiomatic that any investment in corporate securities bears with it a chance of loss – but maybe others have different axioms:

One of the biggest winners in the push to make money-market funds safer for investors is turning out to be none other than the U.S. government.

Rules adopted by regulators last month will require money funds that invest in riskier assets to abandon their traditional $1 share-price floor and disclose daily changes in value. For companies that use the funds like bank accounts, the prospect of prices falling below $1 may prompt them to shift their cash into the shortest-term Treasuries, creating as much as $500 billion of demand in two years, according to Bank of America Corp.

Boeing Co., the world’s largest maker of planes, and the state of Maryland are already looking to make the switch to avoid the possibility of any potential losses. With the $1.39 trillion U.S. bill market accounting for the smallest share of Treasuries in six decades, the extra demand may help the world’s largest debtor nation contain its own funding costs as the Federal Reserve moves to raise interest rates.
…
The changes are intended to prevent a repeat of 2008, when the collapse of the 37-year-old, $62.5 billion Reserve Primary Fund triggered a run on other money funds and deepened the worst financial crisis since the Great Depression.

Still, investors using prime funds to manage their idle cash may find floating prices an unnecessary risk when differences in fund rates are so minimal, said Brian Smedley, an interest-rate strategist at Bank of America in New York.

He estimates about half the $964 billion held in institutional prime funds will flow into those that only invest in government debt and yield about 0.013 percentage point less, before the new rules become fully effective in 2016.

“We’re not really getting paid for the risks associated” and the rules will make these funds even less attractive, Joseph D’Angelo, who oversees $70 billion as head of money-market fixed-income at Prudential Investment Management, said in a July 30 telephone interview from Newark, New Jersey.
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“We’re definitely worried about breaking the buck,” Verett Mims, assistant treasurer at Chicago-based Boeing, said in a telephone interview on July 30. “That’s our biggest problem, the notion of principal preservation.”

The state of Maryland may also refrain from investing in prime money-market funds as a result of the floating-price rule, according to its treasurer, Nancy Kopp.

The changes “make these money market funds less usable, if not usable at all as investment vehicles,” she said in a July 22 conference call organized by the Chamber of Conference.

It seems pretty clear to me that the only thing that will do a lot of good in reducing the risk of capital loss in holding Money Market Funds is capital – whether such capital is directly issued by the MMF, or ‘borrowed’ through a guarantee relationship, probably with its sponsor. But not, apparently, clear to everybody.

It was a mostly negative day for the Canadian preferred share market, with PerpetualDiscounts down 18bp, FixedResets gaining 1bp and DeemedRetractibles off 17bp. There was a bit more volatility than usual. Volume was extremely low.

This entry was posted on Tuesday, August 5th, 2014 at 8:29 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.