Given the new set of rules imposed by regulators on money market funds, investors could shift cash into safe, ultra-short-term Treasuries and related exchange traded funds.
According to Bank of America Corp. (NYSE: BAC), the new rules could prompt investors to move as much as $500 billion into the shortest-term Treasuries over two years, Bloomberg reports.
Additionally, investors can consider short-duration Treasury bond ETFs to easily navigate the market. For instance, the iShares Short Treasury Bond ETF (NYSEArca: SHV), which has an effective duration 0.44 years and 0.07% 30-day SEC yield, and the SPDR Barclays 1-3 Month T-Bill (NYSEArca: BIL), which has a 0.17 year duration and a -0.09% 30-day SEC yield. [Rising Rate Preparation With Short-Term Bond ETFs]
“Whether investors move into government institutional money-market funds or just buy securities themselves, there will be a large demand” for short-dated debt, Jim Lee, head of U.S. derivatives strategy at Royal Bank of Scotland Group Plc’s capital markets unit, said in the article. “That will lower yields.”
Boeing Co. (NYSE: BA) and the state of Maryland are browsing for alternative investment options to avoid potential losses in the money funds market.
“We’re definitely worried about breaking the buck,” Verett Mims, assistant treasurer at Boeing, said in the article. “That’s our biggest problem, the notion of principal preservation.”
Specifically, the new rules require institutional prime money market funds to float their net asset value, which will allow the daily share price of the funds to fluctuate along with changes in the market-based value of fund assets, essentially breaking the so-called buck, or constant share price of $1.00, that many have come to expect. [New Money Market Fund Rules, a Boon for Ultra-Short-Term ETFs]
The changes “make these money market funds less usable, if not usable at all as investment vehicles,” Maryland treasurer Nancy Kopp said.
Money market fund boards can also impose fees or so-called gates during periods of distress. If a fund’s level of weekly liquid assets dips below 30% of total assets under management, the fund could impose a liquidity fee of up to 2% on all redemptions.
“We’re not really getting paid for the risks associated” and the rules will make these funds even less attractive, Joseph D’Angelo, head of money-market fixed-income at Prudential Investment Management, said in the article.
For more information on money market funds, visit our money markets category.