Money fund markets are facing record turbulence as the quarter wraps up in chaos. Even though the quarter end is normally tumultuous, this year the disparity has reached new heights. The market is reeling from the flood of investors who are scrambling to find places to invest. Growing concerns over the October 14th deadline for the overhaul of governing money funds are fueling this financial turbulence. Treasury repo rates are soaring while the Fed’s overnight reverse repos are at record levels. These shocking numbers are setting the stage for the most volatile quarter end since the 2008 financial crisis. Only time will tell if the market will be able to recover from this landmark decision.
Money Fund Reform Has Investors Scrambling
“It’s quarter-end and the money-fund reform all culminating to create more pressure on investors to find places to park cash,” said Gennadiy Goldberg, an interest-rate strategist in New York at TD Securities (USA) LLC, one of the Fed’s 23 primary dealers. The increased use of the Fed’s reverse repos “began much earlier, has been harder and faster than prior quarter-ends.”
It’s no secret that this will be a game changing year for the money market industry. Faced with an epic overhaul, this movement is being hailed as the dawn of a new money fund era. On October 14th, the US Securities and Exchange Commission will implement a new set of rules that will forever change the industry. Under the new set of rules, institutional prime & tax exempt money funds will no longer be able to fix shares at $1. This is causing a tsunami of cash to flood out of those offerings.
Even though this reform intends to make the money-market safer, it is shaking up the entire industry. An estimated $650 billion has left private funds & is flowing into government only money funds. The Fed’s overnight reverse repos has received a $270 billion influx of cash, one of the highest levels since its introduction in 2013. General collateral rates have catapulted past their 0.4% average up to 0.905%. Treasury repo rates have also reached their highest levels since the 2008 financial disaster.
This is far from the first time this amount of turbulence has happened, but it’s impact may linger. After Brexit passed there was a similar spike that was exasperated by haven demands for Treasuries. However, that issue dissipated within a few days. This time around a recovery will be harder to pull off. The impending deadline for money fund changes is the culprit for this new trend.
As bank repo deals grow scarce, the Fed’s facility is giving money funds a place to store their cash. With a 0.25% rate, the Fed’s reverse repo program is extremely enticing to worried investors. This rate is especially tempting since it easily hits the bottom of policy makers’ target range for overnight borrowing costs.
Only time will tell if this overhaul will be able to secure the market. For now Investors are furiously searching for places to store their cash. In a market with an estimated value of $2,6 trillion, turbulence is unavoidable. Even though similar scares have caused panic, the magnitude of these changes is second to none. Only time will tell how the market will adapt to this revolutionary reform.