Pershing
“At Federated, we have been encouraged by the performance of the money market industry in this challenging environment.”
Article Contributed By:
Deborah Cunningham, CFA
Chief Investment Officer, Money Markets
www.federatedinvestors.com
It is understandable that investors are uneasy. A flight to safety in Treasury products, combined with the Federal Reserve Board’s decision to push its target federal funds rate to virtually zero, has created a low-rate environment that has reduced yields across the board, particularly on Treasury and government agency products.
The good news is Federated is beginning to see signs of a return to normalcy—with emphasis on the word signs. We are a long way from typical credit spreads and market behavior, but the cash yield curve has shifted to a positive slope across the Treasury, government agency, and prime sectors from three months to two years out. The gap between yields on Treasury and comparable corporate securities has narrowed, and yields on Treasury bills and agency issues have moved off historic lows. As long as the economy remains weak, we don’t expect a lot to change in the near-term, but we are moving in the right direction.
At Federated, we have been encouraged by the performance of the money market industry in this challenging environment. Industry assets grew 23% last year to a record $3.84 trillion, according to the Investment Company Institute, and net inflows have remained positive into 2009. Much of the recent growth has come in prime money market funds, which as an alternative to government and agency money market funds, offer comparatively higher yields with the same attributes of all money funds: protection of principal, daily liquidity at par and competitive returns.
Like all money market funds governed by Securities and Exchange Commission (SEC) Rule 2a-7, prime funds must invest in prime-rated, high-quality, short-term, dollar-denominated debt instruments such as repurchase agreements and commercial paper, with at least 95% of the investments receiving the highest short-term ratings from two or more qualifying agencies. Except for Treasury and government agency securities, prime funds cannot invest more than 5% of their assets in any single issuer. They also cannot purchase securities with maturities greater than 397 days, and must maintain an average weighted maturity of all securities in a portfolio to 90 days or less.
At Federated, we view these Rule 2a-7 standards as a starting point, not a finishing point. We continue to manage our money market funds with an unrelenting focus on credit analysis and maintaining minimal credit risk. Federated has always sold and redeemed money market fund shares at $1.00 net asset value (NAV); has never had to infuse capital to maintain the $1.00 NAV; and while there are no guarantees such price stability will be achieved in the future, has never broken the $1.00 stated price in its more than three decades of cash management experience.
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