Vanguard is pulling the plug on its $125 billion Prime Money Market Fund.
Prime money funds required a bailout during the COVID collapse just as they did during the financial crisis. Regulations had been put in place to prevent such an occurrence, but with interest rates in the tank, the paltry yield prime money market funds offer isn’t worth the risk.
When the reward for sticking around is at best a percentage point of interest, investors in these funds will always bail at the first signs of trouble. That creates a problem for money funds and the commercial paper market as prime money funds are big investors in these assets.
Vanguard along with Fidelity, which has made a similar decision, should be applauded for pulling the plug on prime money funds.
MarketWatch has more.
In the current crisis, assets under management at prime money-market funds, which buy high-quality corporate debt, declined by 15%, or $120 billion, between March 2 and March 23. The decline highlighted concern that such funds might again break the buck. leaving investors to redeem their funds at less than $1 a share.
The Fed acted swiftly to avert a stampede from the funds like that seen in 2008, moving to improve liquidity through a program that was to be in effect through September. Still, other asset managers are likely to follow Vanguard’s move.
“In a market crisis there is greater risk of a money fund breaking the buck, which carries huge reputational risk,” said Greg McBride, chief financial analyst at Bankrate.com, in an email. “Sticking to government paper reduces the chances of breaking the buck with little in the way of foregone income.”
That’ is Vanguard’s thinking. “We believe government money-market funds better meet investors’ needs for capital preservation and liquidity and that the rewards of prime funds are no longer worth the risk,” a Vanguard spokesman said via email.
Among the risks of nongovernment securities held in prime funds are the possibility of default, and the potential for downgrades to the credit ratings of individual companies to hurt the value of their debt. Another possibility is that large institutional holders of commercial paper might look to dump their positions quickly in times of stress. The government-debt market is bigger, so moves by individual participants are less likely to affect prices.
Yields on money funds have been falling rapidly, with all of Vanguard’s taxable money funds at paltry levels. For example, the Vanguard Pennsylvania Municipal Money Market Fund (VPTXX) has been reporting a yield of 0.01% for weeks.
“The trouble is basically the low, low yield environment. It’s the financial crisis all over again for money-market funds with the Fed at the zero-bound,” said Daniel Wiener, co-head of Adviser Investments, via email. “Vanguard and many others are waiving fees and there will be more fee waivers to come.”
The news is also a wake-up call for investors who may have viewed money-market funds as a safe place for their reserves of cash.
Read more here.