Money Market funds Bubble

Pat38493

A popular finance youtuber has released a video which seems to imply that we should limit our exposure to money market funds.

https://www.youtube.com/watch?v=kx0TRgluVPw

The implication appears to be that he thinks there is a bubble developing in money market funds, they are not as low risk as perceived and they had to be bailed out by guarantees in 2008, and that that potentially it won't be feasible for governments to bail them out again given the huge amount of more money that is in them now.

He released another recent video which seemed to imply that now (or soon) is the time to move back towards bonds from cash.  He seems to see this hinges on when interest rates start to fall.

I also thought this could be a bit funny - if all the finance youtubers start releasing similar videos it could cause the exact effect they are talking about!

I would be interested to see what the experts here think about it as I have about 20% of my pension in MM funds at the moment?  I am not too sure what would actually cause a mass exodus from money market funds in the first place other than very quick and unexpected falls in interest rates.

Albermarle

He released another recent video which seemed to imply that now (or soon) is the time to move back towards bonds from cash.

As in a previous thread, this 'advice' seems to be quite widespread. Not because of fears about MM funds, but due to the fact it is seen as a potentially lucrative move if/when interest rates fall. ( although bond funds are already around 6 or 7% up from the bottom)

dunstonh

I haven't watched the video but is he on about money market funds or short term money market funds?

Is he referring to the UK market or other countries/regions?

personally, I wouldn't use MMFs but have no problems using STMMs

ZeroSum

MMF's pretty much just track the base rate, how can there be a bubble?

Hoenir

A muddle of a presentation. Who was this addressed at, i.e. people in the UK in US. As flicked from one jurisdiction to the other. A fair number of generalisations as well. Meddled together to create a compelling story.  That is of little value. 

The issue with liquidity though is a real one. As there's an assumption by many people that MMF's , as suggested by their name, are cash funds. When in reality the funds hold the bulk of the fund's money in short dated tradable instruments. If there was a sudden demand by investors for their cash back. The underlying assets could well be sold at fire sale prices. Resulting in investors receiving less than they would have expected. Potentially even a loss. Funds that offering their products to retail customers need to hold a greater % in hard cash. Though at the expense of the return on offer. Historically MMF's are more the preserve of Corporate entities. 

This a side effect of the new higher interest rate era. Which when combined with Quantitative Tightening. Is going to create all sorts of temporary bulges as cash gets moved around with investing acting like a herd of stampeding buffalo. All chasing the highest short term returns. 

As for the US. Retail customers at banks etc are poorly served and generally don't have access to the deposit accounts we do in the UK. MMF's therefore are attractive. Though the US banking system is far less well regulated than the UK. As events earlier this illustrated. 

Pat38493

dunstonh said:

I haven't watched the video but is he on about money market funds or short term money market funds?

Is he referring to the UK market or other countries/regions?

personally, I wouldn't use MMFs but have no problems using STMMs

What is the difference?  I just watched the video again and he just refers to "money market funds" throughout.

My holding is with Royal London short term money Mkt Y Acc - according to Morningstar the fund is classified as almost entirely "cash".

He is claiming
- Money market funds currently hold just 30% of their funds in assets that can be liquidated within 7 days.
- These funds are a "shadow banking risk" as they use the money markets to raise money in order to buy assets with longer term maturities.
- They don't have any protection against loss from the normal banking protections.
- If there was a run of investors all wanting to take their money out, there would be a fire sale.
- This happened in 2008 and the funds was "gated" and the US govt stepped in to guarantee the value.
- The Dodd Frank act would prevent the (US?) government from doing this in future.

coastline

Pat38493 said:

dunstonh said:

I haven't watched the video but is he on about money market funds or short term money market funds?

Is he referring to the UK market or other countries/regions?

personally, I wouldn't use MMFs but have no problems using STMMs

What is the difference?  I just watched the video again and he just refers to "money market funds" throughout.

My holding is with Royal London short term money Mkt Y Acc - according to Morningstar the fund is classified as almost entirely "cash".

He is claiming
- Money market funds currently hold just 30% of their funds in assets that can be liquidated within 7 days.
- These funds are a "shadow banking risk" as they use the money markets to raise money in order to buy assets with longer term maturities.
- They don't have any protection against loss from the normal banking protections.
- If there was a run of investors all wanting to take their money out, there would be a fire sale.
- This happened in 2008 and the funds was "gated" and the US govt stepped in to guarantee the value.
- The Dodd Frank act would prevent the (US?) government from doing this in future.

I hold the same as part of an investment ISA . Fund was launched 1999 and the chart does stretch that far back . There doesn't seem to be any blip in the price despite the 2008 situation.

Royal London Short Term Money Market Y Acc Fund factsheet | Trustnet

I've also set the chart to 2007 to 2009 and again there doesn't appear to be any blip in the RL fund.

Chart Tool | Trustnet

We can all guess and IF rates are cut due to a world downturn then I can't see any less than 3% . More than that would probably mean huge global problems. Dotted line has 3.8% projected for FED and EU, UK will be similar as they are all working together at the moment. Gilts/bonds have already adjusted upwards in anticipation of pause in rate cycle.

F-XSYgQXsAE3vNQ (900×525) (twimg.com)

Hoenir

Pat38493 said:

dunstonh said:

I haven't watched the video but is he on about money market funds or short term money market funds?

Is he referring to the UK market or other countries/regions?

personally, I wouldn't use MMFs but have no problems using STMMs

My holding is with Royal London short term money Mkt Y Acc - according to Morningstar the fund is classified as almost entirely "cash".

Basic information can be found with a few clicks here. 

https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/r/royal-london-short-term-money-market-class-y-accumulation

In addition. 

"The fund is not a guaranteed investment.

Principal Fluctuation
An investment in the fund is different from an investment in deposits.The principal invested in the fund is capable of fluctuation in value.

No External Support
The fund does not rely on external support for guaranteeing the liquidity of the fund or stabilising the NAV per unit or share.

Risk of Loss
Any risk of loss of the principal is to be borne by the investor." 

RogerPensionGuy

https://www.investopedia.com/terms/g/gateprovision.asp#:~:text=A gate provision refers to,be restricted or halted entirely.

As I understand it, these MMFs have various gates fitted and had "assumed" they would just close the gates and have an easy processing method of paying out cash if required, however I normally pick up the wrong end of the stick on these matters.

Maybe others will post on my views.

Cheers Roger. 

Hoenir

Funds that tend to get gated as those holding illiquid assets such as OEIC's holding property. 

The danger to MMF's is if there were to be a stampede for the exit by the fund's investors. Firesale of assets could result in a sharp temporary fall in the value of asset prices. Markets can take time to digest large tranches of stock. Remember every trade requires a counterparty to conduct it. Something that often gets overlooked. In the course of a daily market trading session pricing is very much dictated by supply and demand. 

OldScientist

An interesting way of seeing how vulnerable MMFs are is to have a look at their holdings, in particular the maturity.

Taking the popular Royal London Short term MMF. According to their liquidity report (23 November),
15% matures in one week
2.6% in 2 weeks
12% in 2 months
28% in 3 months
and about 9% in over 6 months (up to a year)

Given that about 20% of the fund is in government bonds/bills - unless the UK defaults (not sure whether they are all UK or not), these should be OK and cash returned with interest given some time (even large increases in yields wouldn't affect the prices too much - e.g., a 10% increase in yields would depress the price on a 3 month bill by about 2.5% - unpleasant, but not a disaster).

The 5% or so in corporate bonds might be trickier if there was liquidity problems (or failures) with businesses.

The 70% in cash or equivalent (largely certificates of deposit with various banks - UK and foreign) will be OK provided banks also retain liquidity. If a single bank goes down, the diversification in holdings will mean that losses will potentially be fairly small (e.g., the largest holding, with Nationwide BS, is 3.7%). If there is a system wide failure (like we came close to in the GFC*), then this might be a lot worse.

Notwithstanding FSCS protection, to some extent these risks overlap with holding cash in savings accounts in the event of a systemwide crisis (e.g., RBS and Northern Rock were both bailed out during the GFC - savers would have lost out if they hadn't been) - hopefully those of us who have money with the various challenger banks (i.e., small enough to be allowed to fail!) won't, in due course, regret chasing higher interest rates. However, MMF are not as safe as cash and can lead to loss of capital.

https://monevator.com/money-market-funds/ has a nice explanation of the risks.

* In one of the recent obituaries for Alistair Darling it said that during the GFC, representatives from RBS contacted him saying that they were going to literally run out of money for branches and cash machines. He asked how long they had, expecting an answer of "a few days", but was somewhat surprised to be told "a couple of hours". Apparently, this stretched even his usually unflappable demeanour.