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Jerome M. Schneider
Perhaps the most obvious choice, simply switching from prime funds to government-only MMFs, may not ultimately be the best solution. We estimate that investors could seek that switch with more than $500 billion in assets. However, the supply of AAA-rated investable assets for these funds to invest their proceeds is shrinking as the U.S. government deficit declines and other issuers opt for longer-term financing in the low interest rate environment. Demand, meanwhile, is rising, in part due to central clearing collateral requirements for derivatives. Both retail and institutional investors could be left out in the cold if the supply-demand dynamic leads sponsors of government-focused MMFs to spurn additional inflows due to more limited investment options. Given the uncertain outcome of these proposals, most investors will likely wait and react once the SEC’s actions are fully implemented. However, we would urge all investors to recognize this possible change in traditional cash management vehicles and educate themselves on alternative liquidity-management options that offer return opportunities in excess of the near-zero returns that are available within this changing landscape. Money market reform is upon us and the cash management landscape is changing. Soon we will see how MMF investors react to the next steps in the evolution of cash management.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks, including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed. Money Markets are not insured or guaranteed by the FDIC or any other government agency and although they seek to preserve the value of your investment at $1.00 per share, it is possible to lose money. Sovereign securities are generally backed by the issuing government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.
Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.
This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2013, PIMCO.
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