2016 Bond Changes- Are Bonds Still Safe or Too Risky

Two years ago, the SEC announced a change in its Money Markets rules. Going into effect October 14, 2016, Institutional prime money market funds will be forced to use a floating NAV (net asset value), instead of using the fixed $1 per share price that has been in effect. As an extra protection during periods of stress, liquidity fees and redemption gates are protection from a run. There may be a big shift in how businesses and state governments use money market funds, which they have treated as bank funds in the past, but the two-year transitional period allowed time to adjust.

Norm Champ, then director of the SEC Division of Investment Management stated that the SEC’s money market fund reforms epitomized “a significant additional step to address a key area of systemic risk identified during the financial crisis.”

Though the rules were intended to make money market funds safer, they’re triggering a migration from prime funds and a stampede into the exempted government-only funds. To address the increased demand, US treasury department has stepped up bill issuance. In a recent Treasury report, the demand for T-Bills was growing due to an estimated $300 billion reallocation to Government funds, though it could go as high as $400 billion, putting pressure on a substantial slice of the $1.51 trillion bill market. The Treasury Department is hoping with the additional bills issued, that there are enough bills to handle the new elevated demand.

Yields on the safest investment from US to Australia hit all-time lows in the last 30 days. Investors have gone on record stating the yields are just not worth the risk. When Japan made only minor adjustments are last week’s meeting, investors were further concerned, and the markets reflected that. Fitch ratings said this year’s drop in bond yields, raised the risk that a sudden interest rate increase could impose large losses; for example, a hypothetical surge in yields to July 2011 levels would trigger losses as high as $3.8 trillion for $37.7 trillion worth of investment grade global sovereign bonds.


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