Money Market Reforms Present Opportunities for Short-Term Bond Investors

Last year the SEC amended the rules governing the money market mutual fund industry in an effort to make funds more stable and less susceptible to financial market contagion. Included in the new regulations are liquidity fees for short-term redemptions and the requirement that NAVs "float" instead of being pegged at $1. These rules apply to funds deemed "non-government," meaning they hold bonds that are not guaranteed by the U.S. government. Government money market mutual funds that hold only cash, government securities and fully collateralized repos can continue to operate as they always have. In reaction to the updated rules, Fidelity, the largest money fund manager, announced last week that its $100 billion Fidelity Cash Reserve Fund will convert to an all-government fund. Its VIP Money Market Fund and Retirement Money Market Portfolio will also transition to become government funds. Other large players in the space are likely to follow Fidelity’s lead. Money market funds are a large source of demand for short-term corporate bonds. Without their buying support, yields will likely be pressured higher, creating an opportunity for us in all strategies, but especially our enhanced cash strategy. As dislocations occur, expect us to act quickly.

Sources: Fidelity, SEC