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[NEW YORK] Eight months after the most sweeping changes to the US money-markets industry in over three decades siphoned more than US$1 trillion from so-called prime funds, the industry's biggest operators are coming to the realisation that the cash isn't coming back anytime soon.
Assets in prime funds, which buy certificates of deposit and company IOUs, have increased by just US$40 billion since regulatory efforts to squelch risk in the industry prompted an exodus of cash to government-only funds, which invest in T-bills and other short-term US debt. The inflows, almost exclusively into the institutional prime sector, have boosted assets to about US$160 billion. On the eve of the compliance deadline in October, more than 40 per cent of respondents to a Citigroup Inc survey expected institutional prime funds to reach an equilibrium size of US$400 billion to US$700 billion. A plurality saw that equilibrium occurring in the second half of 2017.
The Securities and Exchange Commission guidelines were enacted in eight months ago to prevent a repeat of the run on money-market funds that took place during the 2008 financial crisis. The changes forced institutional prime funds to abandon the long-held tradition of having asset values locked at US$1-per-share. Government funds were allowed to maintain the threshold.
At the Crane's Money Fund Symposium in Atlanta last week, attendees cited investors' desire for stable net asset values to the liquidity gates and fees in higher-yielding prime funds as reasons cash is staying away. Others alluded to potential uncertainty surrounding the future of regulation within the financial system, as outlined in a June 12 Treasury report.
"It's a process of regrowing," Tracy Hopkins, chief operating officer at Dreyfus/BNY Mellon CIS, said during a June 21 panel at the conference. "Whether they'll be the size they once were, time will tell."
As prime funds' assets dwindled, companies lost their primary buyer of commercial paper. By squelching demand from prime funds, commercial-paper rates relative to other money-market securities have risen, and are now at the highest levels since the financial crisis, forcing borrowers to scramble for new sources of funding.
There are several scenarios that could win investors back. If a debt-ceiling showdown develops, concern about a US government default could unnerve institutional investors and push them back toward prime funds from government ones.
Another scenario is if legislation percolating in Congress, which aims to undo last year's money-market reforms, is passed.
"The base case scenario is it's definitely an uphill battle to get these through Congress," Garret Sloan, director of fixed income mark strategy at Wells Fargo Securities, said in June 23 panel discussion.
Still, investors may have chosen to leave the money market space altogether and opt for alternative products like private liquidity funds offered by asset managers such as Federated Investors. These vehicles follow similar investment mandates as prime funds, but are not subject to the regulations that were implemented in October.
Regardless of how much money moves or where it goes, some conference participants such as Tony Carfang, a Chicago-based managing director at Treasury Strategies, said assets won't remain in government funds forever as the desire for higher returns win out.
"The jury is still out as to whether prime money funds have a future," Mr Carfang said. "Government funds aren't where money is going to find its long-term resting place."