MMF negative yields will force managers to review their investment objectives, Fitch warns

Euro money market funds’ (MMFs) yields have stabilised at marginally positive levels two months after the ECB cut its deposit facility rate to zero, but could post negative yields if short-term euro market rates move further into negative territory, warned today Fitch Ratings.

This possibility would lead fund managers to review their investment objectives and fund structural features.

According to the agency, MMFs yields are to be consistent with prevailing safety and liquidity costs, commensurate with alternative high-quality short-term instruments, such as ‘AAA’-rated euro treasury bills and MMF ratings must remain a ranking of funds on the basis of their liquidity, market and credit risk profile.

At end-August 2012, constant net asset value MMFs denominated in euro were generating net yields of 8bp on average, down by 11bp from their early July level, before the ECB rate cut.

“While fund managers are still able to find short-dated euro assets delivering small positive yields, further potential actions by the ECB to reduce its reference rates would likely push market rates well into negative territory, and euro MMF yields ultimately as well,” Fitch said.

There is a limit to the extent fund managers can prevent their funds’ yield from turning negative amid a negative short-term market rate environment, while still maintaining prudent investment strategies.

So far, MMF managers have taken a series of measures to maintain their funds’ yields above zero, which include partial fee waivers.
Fund managers have also started to prepare for the possibility of negative yields on euro MMFs, reviewing fund structural features accordingly.

“This notably entails an adjustment of funds’ investment objectives to introduce explicitly the notion of relativity to prevailing short-term market rates. For constant net asset value funds, the stable NAV and related yield distribution mechanism is being reviewed with a view to limiting operational challenges as well as minimising accounting and fiscal implications for investors, without changing the investment pay-off for investors,” Fitch added.

Euro constant net asset value MMF represented total assets of €106bn at end-August 2012, of which €8bn were in government-only MMFs.

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