Money market fund managers, who collectively held their breath after the Federal Reserve issued reserve requirements last March 14, are now heaving a sigh of relief. Fund assets, which for the first time in many months declined following the move, last week recorded their single largest jump -- $2.3 billion -- in history. They currently total $62.6 billion.
While no one expects money market funds will continue to show the phenomenal growth experienced during the 1978-79 rise in interest rates, managers say a combination of factors is working in their favor at the moment. During the past seven weeks, yields on Treasury securities and the sympathetic rates of money market certificates offered by banks and thrift institutions have plunged from about 16 percent to under 10 percent.
Meanwhile, pre-March 14 money market funds yielded an average of 15.5 percent last week, according to Donoghue's Money Fund Report. So-called "clone" funds established after March 14, and subject to 15 percent reserves, yielded about 14 percent. (Merrill Lynch was even paying 22 percent).
The funds can pay higher interest rates now because their portfolios contain investments made when rates were higher. Managers have substantially lengthened the maturity of their portfolios recently, Donoghue reports, in order to give investors those higher yields as long as possible.
What will happen when the gap between money market mutual funds and money market certificates narrows is certain to be one of the topics for discussion at a two-day meeting of the Investment Company Institute, starting this Tuesday at the Capital Hilton. ICI, the trade organization for mutual funds, also will be discussing th e Fed's curb.
Fund managers attribute April's decline to the confusion that followed the Fed's announcement, the inability of funds to advertize before they knew the rules for clone funds and customer withdrawals to pay taxes.
Another reason was undoubtedly the desire of sophisticated customers to lock into high-yielding fixed-income investments soon after it became apparent interest rates were falling. Between March 31 and May 7, the Fidelity Group in Boston showed a decline in its Daily Income Trust (a money market fund) from $2.77 billion to $2.65 billion. Assets of its high-quality long-term municipal bond fund rose during that period from $373 million to $482 million, and its long-term corporate bond fund rose from $78 million to $98 million. The bond funds had registered either no gain or a decline in March. m
These are mutual funds based on either corporate (taxable) or municipal (tax exempt) bonds. Yields on open-ended bond funds are variable whereas those on unit investment trusts (bond pools) are fixed for the life of the trust, some 15 to 20 years. Several brokerage houses reported a brisk business in unit trusts recently.
Merrill Lynch's Bond Funds Group director Normam Schvey observed that in the six weeks following March 14, sales of long-term corporate trusts totaled $82 million, compared with just $65 million in the preceding two and a half months. The average yield was 13 to 14 percent. By contrast, sales of short-term (six-month) trusts declined from $2.4 billion to $1 billion, as yields dropped from 15.5 to 11.5 percent.
"We now sell out unit trust issues in two to three hours instead of two to three days," said Schvey.