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Post-Rule Change, Prime Funds in the Balance

Signals point to prime fund inflows but nothing yet and extent unknown.

October 14 has come and gone and there are a couple money market fund trends that may bode well for prime money market funds. One is that spreads between institutional prime and government MMFs have widened since the October 14 implementation of new SEC rules. The second is that prime fund portfolios’ weighted average maturities (WAM) have lengthened somewhat. These shifts may eventually bring back some lost luster to prime funds for corporate treasurers, but so far inflows have yet to materialize, and views split sharply about whether they ever will.

[…] The outflow from prime funds has slowed to a trickle, with a mere $6 billion more bleeding out since mid-October. Anthony Carfang, managing director at Treasury Strategies, a Novantas company, said he does not anticipate anymore material outflow, and money will flow back when investors see “all clear” signals, such as longer weighted average maturities (WAM), asset inflows, and minuscule net asset value (NAV) fluctuation. He added that the money leaving prime funds went mostly to MMFs investing in government securities, including treasury and agency securities.

“We think that’s important to note because government funds rarely represent the maximum investor utility for corporate treasuries,” he said. “That tells us the money is using government funds as a temporary holding placed, with the exception of money coming from sweep accounts, which require a constant net asset value—about a third of the new money in government MMFs.”

[…]Treasury Strategies sent a comment letter to the SEC in 2011 that argued against a floating NAV. Since then, however, the IRS has greatly simplified the accounting by allowing institutions to book the changing values in other comprehensive income rather than earnings. In addition, the ability of the funds to retain amortized cost accounting on securities maturing in 60 days or less significantly narrows that band in which the NAV could fluctuate. The prime MMFs will still have to be marked to market on certain accounting period closings, Mr. Carfang said, but a loss of a few bps is minor compared to the additional yield offered by prime funds.

Read the full article on iTreasurer

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