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A $500 Billion Stampede in Money Markets Even Before New Rules Hit

The last big post-Lehman regulatory change is reverberating across the financial system, potentially squeezing short-term lending for businesses and local governments.

The rules haven’t taken effect yet but are already upending the $2.7 trillion money-market industry, causing nearly $500 billion to move into, out of and among these funds, which are used by investors to stash their cash and by borrowers for short-term liquidity.

[…] The cost to borrow for these governments has gone from 0.03% last year to 0.48%, which includes the Federal Reserve’s December rate increase, according to Anthony J. Carfang, managing director of Treasury Strategies (a division of Novantas, Inc.), which advises governments and companies on managing their cash.

Several indicators are showing stress in these short-term markets, but the real risk is what happens when liquidity tightens. These markets tend to be fairly segmented with different types of buyers getting different sources of funding.

Companies and municipalities with the highest ratings will find the cash they need. But that could leave others scrambling for what’s left. “The scarcity gets pushed down to the smallest and least creditworthy borrowers,” Mr. Carfang said.

Like banks, money-market funds will be less risky. The test of the new rules will be whether the gains in safety outweigh the economic impact of the decline in lending and reduction in liquidity.

Read the full article on The Wall Street Journal…

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