Some US asset managers are slashing fees on money market funds so their investors don't lose money because returns are so low
by Shalini Nagarajan- Asset management firms in the US are slashing fees charged on short-term debt funds as plunging interest rates and yields on US government debt mean that investors risk losing money simply by investing in them, the FT reported Friday.
- Federated Hermes, Fidelity Investments, and TIAA-CREF have scrapped or lowered fees on some funds, and are still monitoring yields before considering further cuts.
- A drop in the 3-month Treasury bond yield, caused by the US central bank's near-zero benchmark rate, has sharply dragged down overall returns for investors.
- Negative interest rates "could be detrimental to the nearly $5 trillion money market mutual fund space," according to money manager Megan Horneman.
- Visit Business Insider's homepage for more stories.
Asset management firms in the US are slashing fees charged on short-term debt funds as plunging interest rates and yields on US government debt mean that investors risk losing money simply by investing in them, the Financial Times reported Friday.
The Federal Reserve pushed its key interest rate to financial-crisis level at between 0% and 0.25% during the heat of the pandemic in mid-March as the US went into lockdown mode, and the coronavirus hit all sectors of the economy.
This pulled the 3-month US Treasury yield to a meager 0.14%, and the benchmark 10-year yield to an all-time low of 0.318% in March.
Although returns on short-term Treasury instruments remain negligible, worried investors are still flocking to invest their cash into money market funds, which are generally low return, but extremely low risk.
Assets in money markets have risen by over $1 trillion to $4.8 trillion since the start of March, the FT said, citing data from the Investment Company Institute.
That huge flow has led asset managers in the industry to buy debt with near-zero yields, significantly pulling down overall returns.
So low are returns on some funds now that a handful of money managers have had to cut or remove fees on their products so that investors don't lose money just by investing in the funds.
Three firms that handle some of the largest short-term debt funds in the US have already cut fees on many products, the FT said. These are: Federated Hermes, Fidelity, and TIAA-CREF.
Pittsburgh-based Federated Hermes has cut fees on over 30 money market funds, while New York-headquartered TIAA-CREF cancelled its charges on two funds invested in government debt and government-backed securities, the newspaper reported.
Fidelity, one of the biggest asset managers, has waived fees on some funds, and told the FT it was closely monitoring yields on its money market mutual funds before cutting further.
Having to bow to pressure from falling interest rates, short-term debt funds are faced with a risky future if the Fed decides to go the way of pushing interest rates into negative territory.
However, Fed chairman Jerome Powell has been vocal about his stance against negative interest rates, and has gone as far to say they remain out of the question.
"The committee's view on negative rates has not changed. This is not something we're looking at," Powell has said.
Speculation continues about their use in the US however, and analysts at Standard Chartered said this week that if the Fed were to implement negative interest rates, it would have to be at least -0.5% or -1%, rather than a small cut below zero.
"Negative interest rates are a dangerous tool and should only be considered in a worst case scenario," according to Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.
"In the US, it could be detrimental to the nearly $5 trillion money market mutual fund space," she said.