Repo returns plummet for money market funds

Money market funds are the latest victims of the new FDIC fee on repo transactions and other bank debt, according to the Financial Times April 11.

Financial institutions have cut back on their borowings on the repurchase market because the FDIC fee makes those borrowings too expensive, as RepoWatch reported April 7. That hurts money market funds who traditionally are repo lenders and depend on the repurchase market to boost returns for their shareholders.

Twenty-seven percent of money market funds’ money is in repos, Peter Crane, president of Crane Data, which tracks money market funds, told the Financial Times.

From the Financial Times:

Hundreds of billions of dollars invested in money market funds face almost zero returns after sharp falls in short-term interest rates.

The key interest rate for funding trades in US Treasuries fell to a tiny fraction of 1 per cent on Monday.

Nearly a third of the $2.75 billion that sits in US money market funds is invested in the repurchase or repo sector, trading in which has been hit by a new charge levied on banks at the start of the month by the Federal Deposit Insurance Corporation.

The plunge in short-term interest rates, to just 0.01 per cent, is also due to the temporary absence of some Treasury securities, after wrangling in Washington over the US debt ceiling, that would help soak up excess cash. Bearish positions in government bonds by dealers is another factor behind the squeeze in rates.

April 1 the FDIC began charging banks insurance premiums based on all of their debt, including repos, not just on their domestic deposits.

That makes repos less profitable, at least until the market adjusts to the higher costs or until financial institutions move their repos out of their FDIC-insured commercial banks.

As a result, companies that have been repo borrowers, selling securities for cash, are holding onto their securities, causing a drop in business on the repurchase market.