Money fund yields may fall
Investors who have plowed $3.48 trillion (2 trillion pounds) into money market mutual funds will likely see their already low yields fall further, but few may benefit from lower management fees, as they did the last time the Federal Reserve drove its benchmark lending rate down to 1 percent.
Investors gloomy on emerging market equitiesThe credit market freeze has driven yields skyward on commercial paper and other short-term debt that carry credit risk, and which is the bread-and-butter investment for managers of many "prime" money funds. In contrast, yields on U.S. Treasuries, which have essentially no credit risk, have sunk.
Analysts said that until markets regain some normalcy, funds that buy Treasuries will be the more likely to have to dig into their pockets to maintain a constant $1 per share net asset value, and thus preserve investor principal.
That might also help dissuade investors from moving cash to higher-yielding bank accounts or certificates of deposit that, unlike money funds, have the backing of the Federal Deposit Insurance Corp.
"Eventually the gravity of a lower Fed funds rate will drag rates lower," said Peter Crane, who publishes the Money Fund Intelligence newsletter. "But many money funds now yield more than the Fed funds rate, and the number with an expense ratio over 1 percentage point, you can count on a couple of hands."
Many of the largest money funds, such as Fidelity Cash Reserves and Vanguard Prime Money Market, already have annual fees below 0.5 of a percentage point.
When yields are low, funds' expense ratios are typically the main determinant of investor returns. The Federal funds rate, a benchmark for overnight loans between banks, was last at 1 percent from June 2003 to June 2004.
Greg McBride, a financial analyst at Bankrate.com, offered another reason for fund providers to hold the line on fees: they could use the money.
"I suspect you're not going to see fee waivers to any extent like what we saw in 2003," he said. "We weren't in a credit crunch where the value and liquidity of so many assets were impaired. Also, financial services firms were in much stronger financial shape."
CREDIT CRUNCH SKEWS YIELDS
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