According to Bloomberg, key U.S. money-market funds managers -
JPMorgan Chase & Co.
The Goldman Sachs Group Inc.
) - have curbed new investments in their European money market
funds. This move by the banking giants follows the European Central
Bank's (ECB) announcement of an interest rate cut last week.
ECB has slashed its benchmark rate to a record low of 0.75% after
the economic data of Germany reflected a downside. Further, the ECB
also reduced the deposit rate to zero.
These three firms have stated that new investments would remain
closed until the market stabilizes. However, redemptions of the
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
profits by investing client assets.
JPMorgan closed five euro-denominated money-market and liquidity
funds. As of July 5, these funds had 23.7 billion euros ($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.
Goldman also restricted new investments in its GS Euro Government
Liquid Reserves Fund. Further, BlackRock has constrained deposits
in two of its European funds -- the Institutional Euro Liquidity
Fund and the Institutional Euro Government Liquidity Fund.
These managers took this step in order to protect the interests of
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 upcoming years.
Similar Actions in the Past
Previously, with $1.8 trillion in U.S. mutual fund assets, Vanguard
Group Inc. closed two of its money funds in 2009 for safeguarding
existing shareholders' dilution. The two funds -- Vanguard Admiral
Treasury Money Market Fund and the Vanguard Federal Money Market
Fund -- currently have around $18 billion in assets.
Boston-based Fidelity Investments also limited investments in four
of its money market funds in December 2008. However, these were
reopened in July 2010.
With $2.5 trillion worth of assets, the U.S. money fund industry is
struggling hard with the impact of low interest rates after the
Federal Reserve reduced rates to near zero in December 2008.
To date, the U.S. money fund industry has recorded revenue of $4.7
billion, down from about $12.5 billion in 2008. Moreover, average
yields came at 0.6%, falling from 5% in 2007.
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 in the ongoing economic situation.
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 safe asset
class. As a result, the yields on benchmark treasury bonds are
hovering at low levels.
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We don't expect the potency of the sector to return to its
pre-recession peak anytime soon. The economic intricacies may even
result in further disappointments in the upcoming quarters.