It seems preposterous to worry about rates on money market mutual funds sinking further. Many already yield less than .05%, which is equal to $500 a year on a deposit of $1 million. Pretty soon your mattress will be a better deal.
But with money market reform back on the table, lower yields may indeed — seemingly against all odds – be in store. Collectively, the 56 million savers in these funds have a lot at stake. Even a miniscule rate cut in a $2.6 trillion market could amount to more than $2 billion in lost income each year. Despite their pathetically low yields, money market mutual funds remain a popular place for both individuals and institutions to park cash over short periods; they are regarded as a safe and highly liquid alternative to similar bank products that may yield more but are saddled with minimums and restrictions.
(MORE: Why Risk Is Back in Fashion)
Money market mutual fund reform has been on the radar since 2008, when a run on fund assets related to the financial crisis threatened to go global and bring the financial system to a halt. The government had to step in with guarantees to calm the market. In recent years a variety of safeguards have been proffered; the financial industry has been able to swat most of them away.
The whole effort was left for dead in August, when Mary Schapiro, chairman of the Securities and Exchange Commission, couldn’t muster enough votes for her measures. She had wanted to force firms offering money market mutual funds to either maintain a higher capital reserve or abandon their funds’ stable $1 per share value, which is a fiction maintained by firms kicking in their own cash when needed. The value of assets in these funds fluctuate and without such adjustments the share price would fluctuate too — like the share price of an ordinary mutual fund.
The Boston Fed found that between 2007 and 2011, 78 money market mutual funds received $4.4 billion in aid from the companies that run them. The bank concluded that without the aid 21 of the funds would have traded below $1 a share.
The fund industry argues that steeper capital reserves would drive up costs that must be passed on to investors in the form of lower yields, and that a money market fund with a floating price per share would quickly send savers to less liquid options—robbing them of financial flexibility. This view had largely prevailed until September, when the superseding federal regulator Financial Stability Oversight Council picked up the torch that Schapiro could not keep lit.
In practical terms, this means the SEC will have to take another look, and already one of the opposing commissioners has said he’s likely to change his mind. He believes a floating share price might not be so bad after all.
(MORE: 10 Questions for Gerhard Richter)
There’s a lot to like about money market mutual fund reform. The goal is to fortify the industry against a run on assets and so eliminate any potential need for future government intervention. Meanwhile, a floating share price would remind savers that money market mutual funds are investments in short-term debt—not federally insured deposits like the money market accounts that they are often mistaken for. With a money market fund you can lose money, though that almost never happens.
Yet everything has a cost. In a paper released in June, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness found that reform threatened to shrink a critical industry and force higher costs not only on individuals but governments and corporations as well, and so damage the economy.
With the oversight council renewing the push for reform, it seems we’re destined to find out if these supposed horrors will come true. The good news for individuals is that money market mutual fund yields won’t go below 0%. So they really can’t be cut all that much anyway.