Low yields increasing pressure on money market funds, Moody's warns
GLOBAL - Moody's Investors Service has warned that the prospect of a prolonged period of low yields is adding to the challenges faced by an already beleaguered money market fund industry.
Money market fund managers have taken a number of actions as a result, including fee waivers, refusing new subscriptions and imposing up-front liquidity fees to offset negative yields.
But Moody's warned of the impact such actions might have on investors, as well as money market funds' ratings.
It went on to say that a manager's decisions around fee waivers, for instance, could have unintended consequences, such as reducing the manager's profitability, increasing redemptions or attracting volatile investors.
It also pointed out that closing the fund to new investors - to reduce the need to buy into a low-yield market - simply deferred the impact of negative yields.
"With portfolio weighted-average maturities for euro-denominated European government funds at around 43 days as of 31 August, most securities are expected to roll off within six weeks," the report continued.
"A restriction on fund subscriptions does not in and of itself affect a fund's rating. However, there could be a negative ratings impact in the absence of other steps taken to forestall the erosion of principal resulting from the replacement of higher-yielding assets with lower-yielding assets."
Lastly, Moody's called on money market fund managers to make sure investors would be able to redeem their shares based on the original terms, if fund managers decided to assess a charge to investors, payable in shares, for each day that the fund was in a negative-yield position.
"Under this method, any daily negative yields would be offset by the share charge, while daily positive yields would be declared as dividends," the report said.
"This approach would have the effect of creating a 'negative-in-kind dividend' when fund yields fall below zero."
However, according to Moody's, this strategy could also lead to downward pressure on the rating due to the breach of the fund's original objective.