The U.S. debt ceiling crisis, S&P's unprecedented downgrade of America's AAA credit rating and eurozone debt woes have delivered a triple-whammy to money market strategies, but this time, the sector is proving resilient.
“For money market strategies, it's the biggest test since Lehman Brothers” in 2008, said Martyn Simpson, London-based senior associate within Mercer LLC's bond manager research boutique. “So far, they're holding up well” under redemption pressure.
Investors withdrew $148 billion, or about 5% of total net assets, from money market funds during the three weeks ended Aug. 2, the deadline for debt-ceiling negotiations, according to data provided by iMoneyNet, a money market research company based in Westborough, Mass. In comparison, about $16 billion was redeemed during the same period last year.
In the two weeks following Aug. 2, investors sought safety from turbulent global markets and returned to money markets — with inflows of about $88 billion.
However, money market fund managers still face several major challenges, said Viktoria Baklanova, New York-based senior director in the fund and asset manager rating group at Fitch Ratings Ltd. The low interest-rate environment already has made it very challenging for fund managers to operate profitably. In addition, the continuing regulatory debate over the structure of the money market sector is causing a lot of uncertainty. On top of that, there are far fewer investment options, particularly as recent market volatility has forced cash fund managers to shorten the duration of portfolios, which already are under more restrictive investment guidelines.
“Until these issues are resolved, it's difficult (for managers) to build a sustainable strategy,” Ms. Baklanova said.
Yields on money market funds have suffered. According to iMoneyNet, the simple seven-day average performance on all taxable money market funds was 4.77% on April 3, 2007, compared with 0.76% at the end of December 2008 and 0.03% at year-end 2010. The average seven-day yield as of Aug. 16 was 0.02%.
Pressure on short-term liquidity strategies was exacerbated by the congressional stalemate over negotiations to raise the debt ceiling in the U.S. and the subsequent downgrade by Standard & Poor's of the country's credit rating amid worsening eurozone economic weakness, sources said.