New Rules on Money Markets hinder liquidity

by Laura Ehrenberg-Chesler on August 4, 2016

in Credit Crisis,Fixed Income,interest rates

While the new rules governing money market funds are not fully implemented yet, they will be in the next three months. As a result, almost 500 billion dollars has been pulled out of prime money-market funds in the past year, and there will likely be more turmoil to come. Liquidity will be reduced, as well as flexibility for those companies wishing to borrow. Here is an excerpt from a “WSJ” article as well as the link to the full article below.

“The flip side is that $420 billion that used to be loaned to companies, mostly in the form of commercial paper, has disappeared from the system. That has forced companies to find other ways to borrow—either by taking loans from banks or selling longer-term bonds—both of which can be more costly. Peter Crane of Crane Data, which tracks money-market funds, says another $500 billion could leave prime funds.

Companies have also used these funds to park their own excess cash, but the new rules have forced many companies to turn to government money-market funds, which pay less.

“The cumulative effect will be to reduce liquidity,” said Thomas Deas, chairman of the National Association of Corporate Treasurers, who retired as treasurer at chemical maker FMC Corp. in April. The new rules also reduce flexibility, potentially making companies more cautious with their spending.

The other big losers are state and local governments. To comply with another set of new requirements—too arcane to delve into here—brokers are pulling their clients out of muni money markets. These markets make short- term loans to governments, and already the assets in these funds are down from $246 billion to $183 billion in the last 12 months.”

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