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Money funds face new pressures

Posted by Jill Boynton  April 8, 2010 10:45 AM

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Starting in May new rules imposed by the SEC may increase the quality of money funds but dampen their yields.

As of next month the SEC will require money funds to hold more liquid investments. The weighted average maturity of the fund's portfolio will be reduced from 90 days to 60 days, 10 percent of assets must be held in securities that mature in one day, and 30 percent in securities that mature in one week. In addition money funds will have to hold more securities with high quality. Most funds should not have to adjust their portfolios much to adhere to these new rules.

Because yields on money funds are currently very low – averaging about .05 percent, many funds have waived their management fees in order to avoid having negative returns. The new restrictions could lower yields (since shorter maturity and higher quality bonds have lower interest rates), putting more pressure on already rock-bottom yields. The decrease should be small – only a few basis points. But since January 63 firms have already either closed or merged with other funds, and the new rules may force more funds to exit the business.

In addition, in December money funds must begin to disclose the value of their assets, on a 60 day lag, every month as opposed to the current twice-a-year reporting. This will help investor assess the strength of the fund.

Don't expect yields to jump up if the Fed starts to increase interest rates. Analysts say that funds will be using the extra interest income to reinstate the fees they have waived. It may take several rate increases before you see yields rise.

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