Money market funds are rebounding after years of being unprofitable for managers, due in part to rising short-term interest rates and recently implemented regulations.
And thanks to those regulations put in place a few years ago, managers and other industry observers remain optimistic that money market funds will be a good source of revenue in the years to come — provided, of course, that the industry doesn't enter another zero-rate environment.
"As recently as a few years ago money market funds were negative yielding. So, to hear them come around so soon is a bit surprising," said Nathan Wong, a vice president and fixed-income investment consultant in Callan LLC's global manager research group, San Francisco.
"We could all speculate on how long this could last but we're in a Goldilocks environment for money market funds," he added. "Yield is more attractive."
Data from the Washington-based Investment Company Institute show that all money market funds gained $190 billion in assets in 2018 from 2017, up nearly 60% from $119 billion in assets gained in 2017 from 2016. This year, assets are up another $50 billion through May 15, 2019. And with interest rates currently around 2%, money market fund assets stood at $3.1 trillion as of that same date.
Effective Oct. 14, 2016, changes made to the U.S. Securities and Exchange Commission's rule governing money market funds required funds to increase transparency and their resilience during market downturns, while also maintaining their benefits, such as daily liquidity, safety of principal and low risk profiles.
Under the regulations, institutional prime money market funds now have a floating, market-based net asset value, rather than the traditional stable $1 per share net asset value.
In addition, the regulations allowed funds to impose redemption gates and liquidity fees of up to 2% of assets to prevent abrupt outflows from funds in times of severe market stress.