Money fund firms withdrawing from Treasury program

Signaling greater stability in the credit markets, most of the major fund complexes offering Treasury money market mutial funds have discontinued their participation in the federal guarantee program on those funds.

According to Peter Crane, president of Crane Data LLC, a Westborough, Mass., research firm that focuses on the money market industry, the large fund firms dropping guarantees on Treasury money market funds are keeping the insurance on prime money market funds and money market funds that invest in non-government debt.

Some observers expect the Treasury Department’s guarantee program to end in September. The program was launched last September after a fund managed by The Reserve Management Co. Inc. of New York lost value and “broke the buck,” causing panic in the money markets. Other observers, however, say it’s too early to predict whether the program will be discontinued.

BlackRock Inc. of New York is one of many firms that discontinued participation in the guarantee program for four of its money market mutual funds that invest in Treasury securities.

“The decision was made for both economics and the fact there has been a tremendous relaxation in the grief and consternation in the marketplace,” said Paul Audet, managing director and head of cash management at BlackRock.

“In the last six months, we have seen the markets resume more normal trading. The insurance was also costing these investors some return. It was costing four basis points of yield over a full year to have that insurance.”

When the Treasury first introduced the program, the concern was not focused on Treasury money market funds, he said.

Investors were more concerned about prime money market mutual funds, which can invest in corporate and bank debt such as commercial paper, corporate notes and CDs.

“Clients were not so much concerned about losing money with Treasury funds [at that time],” Mr. Audet said. “But everybody was looking for an extra ounce of protection.”

BlackRock has continued the participation in the program for its other money market mutual funds.

“The reason everybody is staying with the insurance with the prime funds is not because of the market dynamics,” Mr. Audet said. “It’s because of the exposure and discussion in the newspapers and the hyperbole coming out of Washington. Investors feel more comfortable that they have that backstop.”

The Vanguard Group Inc. of Malvern, Pa., discontinued participation in the federal program for its Treasury money market mutual funds and retained it for its other eight funds, said spokeswoman Rebecca Cohen.

“In the beginning of the program, there was so much uncertainty around the credit markets and money market funds,” she said. “But now, there is redundancy there [for the Treasury funds] because you have the full faith and credit of the U.S. government behind the securities in the funds.”

Fidelity Investments of Boston did the same.
“Our government and Treasury-only money market funds invest in government and Treasury securities, which are the highest-quality securities available in the marketplace,” Fidelity spokesman Alexi Maravel said in an e-mail.

“The short-term credit markets are already trading efficiently and are back to levels that were seeing prior to September [2008],” Mr. Audet said.

“I’m about 60% sure that the program will go away and 30% convinced that it will continue in some form,” Mr. Crane said.
“The other 10% is for something to happen that we haven’t thought of. But no matter whether the program continues or not, if something happens, Treasury will step in.”

The idea that the current program may change into something else is on the minds of many advisers and consultants.

“It’s hard to imagine that the program would go from what we have now to having nothing,” said Connie Bugbee, managing editor at iMoneyNet, a Westborough, Mass. based research firm. “They could establish another form of money fund insurance.”

Still, at least one adviser said clients are not as concerned about the insurance.

“My clients are out of panic mode,” said Cary Carbonaro, president of Family Financial Research of Huntington, N.Y., which manages $40 million in assets.

“It feels like some of the fear is gone. I don’t see the insurance as having a huge value. In addition, the clients will be paying for it with a lower yield,” she said.