Interest yields are rising on money market mutual funds as normalcy returns to the pricing of some short-term IOUs -- and other segments of that market remain on edge.
The average seven-day annualized yield on retail money funds that invest only in U.S. government securities jumped to 4.29% in the one-week period that ended Tuesday, from 4.01% the week before, according to IMoneyNet Inc.
In part, the rise reflects a rebound in yields on short-term Treasury bills from their lows in mid-August, when global financial markets were panicking and many investors were flocking to Treasury securities as a haven, said Kerry Gawne, co-manager of the Payden Cash Reserves fund in Los Angeles.
Heavy demand drove yields on three-month T-bills to 2.9% on Aug. 20, the lowest level in more than two years. By contrast, the three-month T-bill yield was 4.37% on Wednesday.
The seven-day annualized yield on the Payden Cash Reserves fund, which restricts its investments to government issues, was 5.09% on Tuesday, up from 4.88% a week earlier.
The $2.7-trillion-asset money fund industry isn’t used to this kind of volatility. Yields on the short-term IOUs the funds buy usually change only gradually, tracking the Federal Reserve’s benchmark rate.
But credit markets have been roiled since July as investors’ worries about losses on mortgage-backed bonds have spread, fueling a widespread aversion to risk. That has driven up interest rates on some non-government short-term IOUs, such as so-called commercial paper issued by companies and banks.
Many general money funds that invest primarily in those securities are gaining from the higher yields. The average seven-day yield on general retail money funds edged up to 4.64% this week from 4.57% the previous week, IMoneyNet said. The latest figure is the highest seven-day average this year.
One key global short-term interest rate -- the London interbank offered rate, or LIBOR -- has taken a surprising jump in recent weeks. That indicates that many British and other European banks are reluctant to lend to one another because of concerns about potential further upheaval in credit markets.
Because the rates on many short-term IOUs worldwide are based on LIBOR, those issuers are paying more to borrow -- to the benefit of money funds.
Policymakers at the European Central Bank meet today and are expected to make another in a series of moves to try to calm lending markets.
Meanwhile, the Fed is widely expected to cut its benchmark rate from 5.25% to 5% on Sept. 18. That would almost certainly mean a gradual, quarter-point drop in money fund yields.
To get ready, the American Century Prime money fund in Mountain View, Calif., has been adding six-month bank certificates and other securities of similar term to its portfolio in an effort to support the fund’s yield if shorter-term rates fall soon, said portfolio manager Denise Latchford.