Dealing with Money Fund reform

As strategies to deal with money fund reform move to the forefront for many treasurers, the landscape for money fund alternatives has evolved significantly. One of the largest factors impacting alternate investment strategies has been the supply contraction of high-grade securities rated AA or higher. Gone are the days when a cash portfolio could be constructed solely with non-government AA and A-1+ credits. Investors now must consider other investment grade ratings to put cash to work. Additionally, access to corporate credits in prime money funds will soon come with floating market values and the prospect of fees and gates that may interrupt liquidity. While these issues may challenge investors who enjoyed higher corporate yields through participating in prime money funds, those who can participate in corporates directly or through custom-tailored separate accounts may benefit from a widening of spreads and supply increases. In fact, over the past ten years the dollar value of A-rated corporates as tracked in the Merrill 1-to-3 year index has increased almost four fold, and supply of investment-grade BBB securities in the index have increased even more. So, as the short government securities continue to be haunted by supply constraints and stressed by demand, those considering alternatives in the corporate sector through individual securities or separate accounts have a bounty of options. To explore these options in detail, this month’s white paper starts from the bottom up and takes a hard look at the subset of investment-grade corporates that have had the greatest increase in supply over the past ten years.

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Best Regards,

Ben Campbell
President & CEO