Euro-denominated money market funds (MMFs) are likely to hit negative yields within a few weeks, said Moody’s Investors Service.
The credit ratings agency (CRA) noted that a persistent low interest rate environment and the European Central Bank’s (ECB) decision last month to cut its deposit rate to -0.2% have significantly eroded the returns on euro-denominated MMFs. As a result, yields on most euro money funds are now nearly zero, despite the fact that managers are already waiving most or all of their management fees.
“The question is not if, but rather when, prime euro money funds will post negative yields. The exact timing will depend on each portfolio’s structure and fee policy,” said Marina Cremonese, a Moody’s assistant vice president – analyst and co-author of a report entitled
‘Negative Yields Alone Will Not Trigger Downgrades of Euro Money Funds’
“Investors will then have to make a choice between paying for safety and liquidity of an MMF, or investing in positive yielding products with weaker liquidity and riskier credit profiles.”
Moody’s added that negative yields alone will not trigger MMF rating downgrades. Funds that can operate within a negative yield environment and continue to meet the investment promise they made to their shareholders are unlikely to experience a rating change, provided that their portfolios’ credit and stability profiles remain consistent with their current ratings.
These include variable net asset value MMFs or constant net asset value MMFs that (i) have implemented a share class reduction mechanism, and (ii) have informed their shareholders, who have agreed to the fund’s structural changes.
“However, negative yields will still exert pressure on fund managers to change their investment strategy to generate higher yield, which may, in turn, pressure their funds’ ratings,” said Vanessa
Robert, a Moody’s vice president – senior credit officer and co-author of the report. “Managers will likely add credit and/or duration risks in order to generate positive yield, in some cases pushing the boundaries of some of the rating factors.”
Moody’s said that most managers have taken proactive steps in the past to maintain their funds’ credit and stability profiles. However, the agency concluded that in a negative yield environment, MMFs will likely face their biggest challenge yet.
The architecture of financial markets has changed and we will soon see the end of the last eight years of prosperity, said Stefan Bielmeier, chief economist and head of research at DZ Bank.
Far and away, the largest financial market on the planet is the foreign exchange currencies market, where on average individuals and organisations trade more than $5 trillion daily. In the FX world, the ability to master the market isn't considered a luxury for treasury officers–it's a necessity.
Treasurers are more interested in cross-border payments and automation than real-time payments, as they are consistently asked to do more with less, argues Rick Burke, head of corporate payments at TD Bank in an exclusive interview.
On the third day of the Singapore Fintech Festival conference, there was a focus on specific applications of fintech innovation. One was trade finance, which is clearly is ripe for a revolution.