September 17, 2015 / 8:17 PM / 4 years ago

No champagne for hard-hit U.S. money funds as Fed holds rates

BOSTON (Reuters) - There will be no champagne corks popping in the $2.7 trillion U.S. money-market fund industry.

A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

The U.S. Federal Reserve kept interest rates unchanged on Thursday, meaning investors will continue to receive next-to-nothing yields on their money funds. And money-fund providers that have slashed fees to provide those paltry yields will have to wait to recapture billions of dollars of lost annual revenue.

An interest rate increase would have boosted money fund yields while allowing money fund providers such as Fidelity Investments, JPMorgan Chase & Co Inc (JPM.N), BlackRock Inc BLK. and Federated Investors Inc (FII.N) to boost fees. Since the 2008 financial crisis, the industry has waived more than $30 billion in fees so investors can have a few basis points of annual yield.

Money market funds, used by corporate treasurers and individual savers to park spare cash, are meant to offer a higher return than an instant access bank account.

Analysts at Moody’s estimate money-fund providers could recover $5 billion of foregone revenue when the yields produced by their portfolios increase by 22 basis points. As those money-fund revenues rise, funds will use that money to reduce waivers and then to increase investor yields.

In the immediate aftermath of a Fed increase, prime money market fund managers who cater to big institutional investors could pull an estimated $50 billion or more immediately from U.S. money market funds to get an instant advantage in commercial paper and other securities that price overnight.

Prime institutional funds had $986 billion in assets as of Sept. 15th.

“This will allow the funds to re-invest at the new higher rate faster,” said Rory Callagy, an analyst at Moody’s.

But that cash is expected to flow back into money market funds as their securities reprice.

“Higher rates are poised to be incorporated in fund yields quicker than in the past,” said Mike Krasner, managing editor of iMoneyNet, a money fund research firm. That is because the maximum weighted average maturity for money funds, a measure of interest rate sensitivity, is now 60 days compared with the previous 90 days.

Prime money market fund managers have already moved aggressively to position themselves for an increase in short-term rates. Their investments in assets that price overnight have reached the highest level in years, according to Moody’s. About 40 percent of prime money fund assets are invested in overnight securities, up from about 30 percent six months ago, Moody’s said.

Editing by Carmel Crimmins and Steve Orlofsky

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