Prime Money Market Fund Exodus Slowing

Prime money fund managers have begun to revert back to more normal portfolio management strategies following money fund reform implementation, as outflows from prime funds have stabilized, according to the latest Fitch Ratings Money Fund Reform Dashboard.

“Managers have been extending maturities and reducing liquidity in a bid to increase prime funds’ yields and lure investors back from government money funds,” says Greg Fayvilevich, senior director, Fitch Ratings.

The mass exodus from prime institutional money market funds slowed down in the week following the implementation of money market fund reforms on October 14, with $3 billion leaving prime funds. This is a relatively modest amount considering that since October 27, 2015, these funds lost approximately $861 billion in assets, primarily to government money funds. The significant shift away from prime institutional funds was largely driven by investor discomfort with the funds’ new features—liquidity fees and redemption gates, as well as a floating net asset values (NAV).

Post-reform, fund managers have been reducing historically high levels of liquidity, although liquidity continues to be elevated. Average weekly liquidity across 28 prime institutional funds reviewed by Fitch fell 7% from a peak of 87% on October 7, 2016, to 80% on October 21, 2016. On average managers continue to maintain significant liquidity buffers above the 30% threshold to avoid the possibility of triggering liquidity fees or redemption gates.

With managers now investing further out the curve, the yield spread between institutional prime and government funds has increased, reaching 0.18% as of October 21, 2016.

“The spread is likely to continue to widen as managers and investors get used to the new environment and portfolios further normalize. Yield differentials may gradually lure investors out of government money funds back into prime funds, or into alternative liquidity products such as short-term bond funds and private funds,” says Fayvilevich.

The report, “U.S. Money Fund Reform Dashboard”, is available at https://www.fitchratings.com/site/re/889672. A login is required.