The short-term interbank borrowing rate known as 3-month US Dollar Libor recently hit a 7-year high.1 Moves of that magnitude can signal systemic stress, but we think the latest jump is being driven by heavy repositioning in money market funds, in reaction to a series of US regulatory changes taking effect in less than three months. These moves highlight why investors should consider a review of their cash and liquidity practices.
We would characterize the climate of investor opinion in money markets today as one of uncertainty. The new rules taking effect in October 2016 in the US include a requirement for prime institutional money market funds (“prime funds”) to adopt a floating net asset value (NAV), plus the potential for liquidity fees and redemption gates. In addition, many prime funds will offer multiple intraday price points (“multiple NAVs”), a feature which we think increases their complexity.
Accordingly, investors in recent weeks have pulled money from prime funds (which shed nearly $125 billion in June) and sent money into government funds,2 with short-term dollar funding rate moves reflecting this retreat. We also see many prime funds reducing weighted average maturities ahead of the enactment of the rules, serving to impact the Libor curve further.
We think more investors are realizing that prime funds’ utility is being fundamentally transformed, and that this realization drives much of the recent market activity. Under the old money market rules, investors generally could access money in prime funds on an hourly basis. Under the new rules, matters may be more complex, with some multiple-NAV prime fund investors waiting as long as three hours to access their money.
Prime funds in our view can continue to play a vital role in serving many investors’ cash and liquidity needs. The key as we see it is understanding that prime funds are now what we would call a “plan ahead” vehicle, more than the same-day liquidity option they represented in the past.
