Prime Money-Market Funds Are Under Pressure. Could They Disappear?
By Lewis Braham
November 6, 2020, Barron’s
What would happen if prime money-market funds vanished? The $4.8 trillion money-market fund industry is a safe, sleepy corner of the asset management industry, until there’s a problem—and then it’s a crisis. So as improbable as it seems, a recent JPMorgan Chase report dove into the possibility that prime money-market funds might simply go away.
Prime money-market funds, which have $1 trillion in assets, were changed significantly by regulations addressing problems from the financial crisis. For instance, institutional prime funds do not hew to the traditional $1 per share net asset value. Prime funds invest in ultrashort-term corporate debt known as commercial paper: Companies, especially banks, issue commercial paper to finance the daily cost of doing business, such as payroll and other regular short-term liabilities. The funds are big buyers of this debt, which makes it easier for companies to function. These funds are generally quite safe, though they’re riskier than money-market funds that invest solely in government securities. Because of this, investors exited in droves when the market crashed in February and March, forcing the Federal Reserve to backstop prime funds—essentially loaning money to funds that had trouble meeting redemptions.
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