Fitch Ratings has warned that Swiss franc-denominated money market funds (MMFs) could see negative yields in the next weeks.
This follows the decision by the Swiss National Bank earlier this month to end the cap of the currency against the euro and to further cut benchmark rates, which were already in the negative. The issue may be exacerbated by the European Central Bank’s (ECB) newly announced QE plans, which could push down yields on euro-denominated MMFs – already at around zero – even further.
The credit ratings agency has said that the weak returns could lead investors to rethink their cash equivalent assets, such as MMFs, although the temptation to dump these should be mitigated by the fact that low-risk alternatives are unlikely to offer better yields.
Corporate treasurers in particular may respond by moving money from MMFs into higher-yielding but less liquid assets, or into longer duration, higher credit risk products, says Fitch. However, options for doing this while maintain the same level of access to funds are limited. Some Swiss banks are saying that they will bring in negative interest rates for larger customers.
While negative yields and attempts to maintain stable unit value, such as unit cancellations, do not attract a negative rating in themselves, “sudden and sharp acceleration in redemptions” can put pressure on the liquidity of portfolios, becoming a negative rating factor.
Changes brought in by the SNB included a 50 basis point cut in central bank interest rates, bringing this down to -0.75%. Government debt is now seeing a negative yield at maturities up to 10 years, and some observers have described the decision to end the franc/euro cap as a “currency war”
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