NEW YORK, Nov 5 (Reuters) - Money market mutual funds, which during the worst days of the credit meltdown had largely suspended purchases of the commercial paper on which many U.S. companies rely for their short-term funding needs, are cautiously dipping their toes back into that market.
Prime institutional money funds, the sector hardest hit by outflows following the Reserve Primary fund’s “breaking the buck” downturn, saw assets increased overnight by $5 billion on Tuesday and by $19 billion over the past week, according to data released on Wednesday by Crane Data, a money-market research firm in Westborough, Massachusetts.
“Prime money funds are the largest purchaser of commercial paper,” said the company’s president, Peter Crane, “so commercial paper demand depends heavily on these asset flows.”
Commercial paper assets within money market funds remained steady at 40 percent of all money market fund investments over a four-week period ended Oct. 30th, but Crane looks to asset flows as the key number to watch.
“Everybody is watching the flows,” he said. “If money funds do not fear redemptions, they will return to commercial paper. Investors are gingerly returning back to money market funds, which allows them to expand their commercial paper holdings. If the Fed buys longer-term paper, then companies will be able to refinance and take back their short-term paper if need be.”
Once considered a higher-yielding alternative to bank accounts, money market funds fell out of favor in September after a money-market fund holding Lehman debt, the Reserve Primary fund, “broke the buck,” or fell below $1 a share.
Since then, Government actions have played a major role in thawing out the market.
The Treasury Department said on Sept. 18th it would insure any publicly offered money market mutual funds, both retail and institutional, that agreed to pay into a government insurance fund.
At the same time, the Federal Reserve said it would buy agency discount notes from primary dealers, acting as a resource when and if money market mutual funds wanted to sell their assets.
In another move aimed at jump-starting the commercial paper market, the Fed agreed on Oct. 7th to set up a facility to buy companies' short-term debt. Since then companies including General Electric Co GE.N and Morgan Stanley MS.N have made use of the facility.
At the time, Fed officials said roughly $500 billion had flowed out of prime money market funds since August as investors began to worry about their ability to redeem their funds.
Finally, the Fed agreed on Oct. 27 to provide $540 billion in loans to money market funds to help them resume their investment activities.
There are initial signs that the moves are boosting investor confidence. Fidelity Money Market Funds, Federated Investors FII.N Funds and Vanguard Funds have all given commercial paper another look.
"Vanguard Prime Money Market Fund VMMXX.O reduced its position in treasuries to purchase other types of securities, including commercial paper when the Federal Reserve announced its lending program," said company spokeswoman Rebecca Cohen.
“Money market funds are walking towards commercial paper, just not sprinting,” said Jeff Kiel, chief executive officer of fund consulting firm Kiel Fiduciary Strategies. “We suggest that the commercial paper market is beginning to thaw, just not totally liquid.”
Ed Yardeni, of Yardeni Research, points to the government action as a source of last week’s stock market rally. “If money market funds are nervous about buying commercial paper, they can sell it to the Fed,” he said. “Investors are less concerned about philosophical issues, and more interested in policy responses that work.” (Editing by Gerald E. McCormick)
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