Vanguard closed its money market fund Treasury Money Market Fund (VUSXX) to new investors to try to keep fund yields positive. This is just the latest sign from the Federal Reserve to keep the money market positive through the coronavirus.
Vanguards move closely follows a similar decision by Fidelity Investments, which declared that a gentle close on three Treasury money funds by at the end of March.
The fund closings are being touted in the best interest of investors, but it also protects fund managers from having to subsidize the capital in case of negative rates.
Many fund managers remember what happened 12 years ago and are hoping to avoid an environment where the funds could go negative.
Fund companies that are shutting Treasury money funds are still offering access to cash funds with broader mandates which allow investors to similar investments such as commercial and mortgage paper.
“On the surface and at face value Vanguard believes it is acting in the best interest of shareholders and that’s their job, but I also wonder if they are trying to push people into their other money market funds,” said Paul Schatz, president of Heritage Capital.
Freddy Martino, a Vanguard spokesman, said that the decision to shut the Treasury fund to new investors is because the fund is made up mostly of Treasuries and the yields are being driven down.
Market analysts are predicting yields could go negative. This would cause the funds to be out of pocket.
During the last recession, both Vanguard and Fidelity closed their Treasury money funds. Fidelity closed its fund from 2008 to 2010 and Vanguard closed its fund from 2009 to 2016.
“Vanguard believes that money market funds provide significant value to investors as a stable and convenient cash equivalent instrument,” the Valley Forge, Penn.-based Vanguard wrote in a statement. “However, an increase in demand for high-quality government money market funds, combined with extremely low yields on U.S. Treasury securities, may have the effect of reducing the Fund’s yield, as new cash flow is invested in lower-yielding securities.”
“Prospective investors will continue to have access to other portfolios in Vanguard’s $414 billion low-cost lineups of money market funds, including Vanguard Prime Money Market Fund, Vanguard Federal Money Market Fund, and Vanguard’s national and state-specific tax-exempt money market funds. Vanguard continues to manage its money market funds very conservatively, focusing only on the highest-quality short-term money market instruments.”
“While most our money market funds have handled recent inflows well, with the recent decrease in the federal funds rate and yields on Treasury securities at historic lows, Fidelity considers that limiting inflows into the Treasury money market funds will help maintain the returns of existing fund shareholders,” stated Fidelity spokesperson Adam Banker.
“We will reopen the capital to new investors once we determine it’s appropriate,” he added.
The motive Treasury funds are being singled out is because they represent the ultimate in security, which means they will probably continue to see strong inflows till investors begin to believe the market is out of the woods.
In accordance with Crane Data, government money funds undergone inflows of all more than $790 billion in March, which more than doubles the $325 billion that flowed into the funds at September 2008, the month that the Reserve Primary Fund saw its net asset value per share drop below a buck.
It is a big deal once the funds with resources 100% guaranteed by the U.S. government, that’s the safest credit on the planet, are not available for investment
