The Federal Reserve's efforts to rebalance its bond portfolio could restore at least some revenue for money market mutual funds that have suffered from low interest rates on their short-term securities, industry specialists said.
With a $400 billion program described Wednesday the Fed aims to cut long-term interest rates by selling short-term securities and purchasing longer-dated Treasuries. The added supply of short-term notes in theory should lower their price and increase the yields they pay.
That could also lead companies issuing commercial paper to offer higher interest rates to the money funds that buy them, said Dan Wiener, who edits a newsletter for investors of Vanguard Group Inc, a big money-fund operator.
"I would be looking for a slight increase" in the yields the money funds could generate, Wiener said in interview. Since the funds now pay close to no interest, he said they will be anxious to find ways to improve yield. "Every basis point counts when you're only getting 1 or 2 basis points," he said.
Low interest rates have been a huge problem for the $2.6 trillion money fund sector and shaken its traditional role as a place investors could earn slightly higher yields than in bank accounts.
Fund companies have waived the fees they charge to hold investor cash as a result, including closely held Fidelity Investments and Vanguard. Charles Schwab Corp waived $240 million in fees in the first six months of 2011 alone, for instance.
Another large money fund operator is Federated Investors Inc, which waived $79.4 million in fees in the quarter ended June 30.
In its last earnings call the company had forecast that if its gross yields improved by 10 basis points, that would likely reduce the impact of fee waivers by one-third, and that a 25 basis-point increase would reduce impact of fee waivers by two-thirds.
Speaking before the Fed acted, Federated Executive Vice-President Deborah Cunningham said it is a "realistic scenario" that the Fed's steps would reduce fee waivers, though not likely soon enough to affect earnings in the third quarter ended Sept. 30.
NOT A LOT OF MONEY
Peter Crane, whose Cranedata.com site follows the industry, cautioned the Fed action might boost yields just by a few basis points, however, which might not make a difference. "Four hundred billion dollars isn't a whole lot" compared with the total industry and other money kept in short-term pools, he said.
© 2017 Thomson/Reuters. All rights reserved.