According to Wall Street Journal,
The Bank of New York Mellon Corporation
Northern Trust Corporation
) are the latest banks to join the list of key U.S. money-market
funds managers to curb new investments in their European
money-market funds. The step, taken by these banking giants,
follows the European Central Bank's (ECB) announcement of interest
rate cut last week.
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ECB has slashed its benchmark rate to a record low of 0.75% after
the economic data of Germany reflected a downside. Further, ECB
reduced the deposit rate to zero.
These banks have stated that new investments would remain closed
until the market stabilizes. However, redemptions of funds are open
to the investors.
Reasons for Closure
Bearing the brunt of record-low interest rates globally and
reduction in supply of debt following Europe's sovereign debt
crisis, money-market funds managers are striving hard to make
profit by investing clients' assets. Therefore, these managers
decided to cut fees that are charged from customers in order to
make their returns above zero and some of them opted to close down
Northern Trust restricted new investments in its Dublin-based Euro
Fund worth €2.6 billion ($3.2 billion). Similarly, BNY Mellon has
constrained deposits in its BNY Mellon Euro Liquidity Fund worth
€2.3 billion ($2.8 billion).
These banks took such a step in order to protect the interest of
the existing shareholders. Restriction in investments will subdue
yield dilution of the current clients. Further, the steps taken by
these fund managers, to restrict or remove limitations, will depend
on the economic environment in the upcoming years.
Similar Actions by Others
JPMorgan Chase & Co.
) closed five euro-denominated money-market and liquidity funds. As
of July 5, these funds had €23.7 billion ($29.2 billion) in assets.
The funds that have been ceased by this bank include JPMorgan's
Euro Liquidity Fund (JPMEULC), Euro Government Liquidity Fund, Euro
Money Market Fund, Euro Liquid Market Fund and JPMorgan Series II
Funds - EUR.
The Goldman Sachs Group Inc.
) also restricted new investments in its GS Euro Government Liquid
Reserves Fund. Further,
), world's major asset manager, has constrained deposits in two of
its European funds - the Institutional Euro Liquidity Fund and the
Institutional Euro Government Liquidity Fund.
Previously, with $1.8 trillion in the U.S. mutual fund assets,
Vanguard Group Inc. closed two of its money funds in 2009 for
safeguarding the dilution of existing shareholders. The two funds -
Vanguard Admiral Treasury Money Market Fund and the Vanguard
Federal Money Market Fund - currently have around $18 billion in
Boston-based Fidelity Investments also limited investments in four
of its money market funds in December 2008. However, these were
reopened in July 2010.
For a long time, the investors have been losing huge amounts of
interest income. If this continues along with increasing regulatory
pressure on the money-fund industry, it would be a huge blow to
investors amidst the current economic downturn.
If the European crisis continues further, there will be significant
impact on worldwide capital markets. On the other hand, the
extremely low interest-rate environment is another manifestation of
this uncertain macro backdrop. Concerns about the European finances
and soft U.S. growth prospects have made treasury instruments the
choice of the safe-asset class. As a result, the yields on
benchmark treasury bonds are hovering at low levels.
We don't expect the potency of the sector to return to its
pre-recession peak anytime soon. In fact, the economic intricacies
may even result in further disappointments in the upcoming