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Money market funds wait to see where the buck will stop
By Saskia Scholtes in New York and Gillian Tett in Davos
Published: January 24 2008 22:44
By Saskia Scholtes in New York and Gillian Tett in Davos
Published: January 24 2008 22:44
One senior regulator said on Thursday: “In the old days, what we had to worry about was the idea of runs on banks in terms of retail deposits. But there is a prospect that we could see a run centered around the money market funds of the type we have not seen before – this is generating a lot of concern.”
If there were widespread losses in money market funds, policymakers fear the political heat will ratchet up as retail investors start screaming and, worse, it could precipitate a widespread withdrawal of cash from money market funds, which could cripple the entire short-term funding market.
For their part, portfolio managers at money market funds are taking precautions. “The bond insurers are absolutely a pressing concern,” said Steven Shachat, a money market fund manager at Alpine Woods Capital Investors. “We have sold out of all our positions in bonds wrapped by MBIA, FGIC, Ambac and SCA – we just don’t want to take that risk.”
The wave of selling from Mr Shachat and other such investors has already pushed prices for insured securities much lower than those for comparable uninsured securities. Mr Shachat says this has created a “two-tiered market” in which yields for insured securities are up to 350 basis points higher than those for uninsured securities – in a dramatic reversal of conventional pricing.
Thus the fear for investors and policymakers is that downgrades of the bond insurers could set off a further panicky wave of selling by money market funds.
If there were widespread losses in money market funds, policymakers fear the political heat will ratchet up as retail investors start screaming and, worse, it could precipitate a widespread withdrawal of cash from money market funds, which could cripple the entire short-term funding market.
For their part, portfolio managers at money market funds are taking precautions. “The bond insurers are absolutely a pressing concern,” said Steven Shachat, a money market fund manager at Alpine Woods Capital Investors. “We have sold out of all our positions in bonds wrapped by MBIA, FGIC, Ambac and SCA – we just don’t want to take that risk.”
The wave of selling from Mr Shachat and other such investors has already pushed prices for insured securities much lower than those for comparable uninsured securities. Mr Shachat says this has created a “two-tiered market” in which yields for insured securities are up to 350 basis points higher than those for uninsured securities – in a dramatic reversal of conventional pricing.
Thus the fear for investors and policymakers is that downgrades of the bond insurers could set off a further panicky wave of selling by money market funds.