Yesterday's Bloomberg article "Money-Market Fund Yields May Fall to Less Than Zero," on the possibility of Treasury fund yields going negative, was followed by a barrage of stories, plus radio and TV pieces, on the topic yesterday. Below, we excerpt statements from Crane Data President Peter Crane's late afternoon interview on Bloomberg TV.
Bloomberg first asked us to clarify the difference between '`breaking the buck' in money funds and the current situation with Treasury yields. Crane responds, "Breaking the buck is where you would see a loss drop the NAV from $1.00 to $0.99 or lower. This is a case of negative yields, and it's still theoretical ... [where] your expenses would outweigh your income." Crane says negative yields are nothing new; checking accounts charging monthly fees used to be commonplace.
Host Matt Miller then cites the 1800's when people used to pay their bank to hold their gold. He asked, "Is that where we're going?" Crane responds, "In a true negative yield environment, that would be the case. I joke 'Cash in the mattress isn't all it's cracked up to be. `You'd be silly to hold physical cash, and of course FDIC insurance doesn't do much for IBM or the State of Minnesota." Crane continues, "You have to remember, all these yields are annualized. I tried to look at how much a 0.5% negative yield would cost you, and on $100,000 it would be something like $1.37 a day. So you're not talking about a real [significant] loss of principal."
How many more funds may have to trim fees? "There aren't a whole lot being forced to waive fees now, and remember they're just waiving part of their fees.... If the Fed cuts again by one-half and if Treasury bill yields stay down, they'll get a lot of company." Crane Data's November issue of Money Fund Intelligence XLS showed 79 funds, or 2.2% of total assets, yielding from 0.00% to 0.25% and 92 funds, or 6.6% of assets, yielding from 0.26% to 0.50%. Thus a total of 169 out of 1,331 funds would likely be impacted by a 50 bps cut.
Finally, Bloomberg asks whether funds would continue waiving fees, stop investors from coming in, or would investors get less than a dollar back? Crane says, "It's uncharted territory, so we don't know. But I look at it and I think they would actually charge by the month. So instead of earning interest income, you would sell shares at the end of the month to pay your fees, similar to that checking account example.... Investors in money funds are of course free to take their money at any moment.... If the loss, or cost, became too great they could move elsewhere. That's part of the Fed's plan. The Fed and the money fund business, I think, would be happy to have an excuse to push investors back into the Prime money market funds that a lot of them left earlier."
