Updated: Apr 13, 2019
Some of the delay, discussion and possible confusion in the implementation of the Money Market Fund Regulation comes from the Share destruction mechanism / reverse distribution mechanism.
The regulation focuses on sharp decreases in asset values and contagion related to that. Negative interests and comparatively benign: they are a known event; they tick away, like accrual – except that it is in the other direction: the investor’s principal gets eaten away.
Negative interest rates have been around since 2010/ 11. Yet, it took MMFR to bring Share Cancellation Mechanisms into focus. They will now no longer exist after March 21, 2019.
It is the oddest of things. Why would anyone invest a hundred dollars only to receive 99 odd cents a year later?
The answer is that there is something worse than knowing how much you WILL lose to negative yields over the year. And that is NOT knowing how much you might lose in other investments or to other events.
In that negative yield environment, public debt adds a layer of additional safety.
It is an environment in which top-rated companies, too, have been able to raise money at negative yields. Investors have been happy to seek safety at a lower cost than public debt.
If investors prefer negative yields as the price of safety, then the Public Debt Constant NAV funds meets their needs.
If investors seek safety at lower costs afforded by a broader spectrum of investments than just public debt, then the Low Volatility NAV, with the safety nets added by MMFR on valuation principles does the job, too.
Negative yields driven by Central Bankers will probably go away, considering that not only is it a rarity, it is also an oddity. Once a Central Banker cuts the bank rate to zero, or near-zero, it has its back to the wall. It has once monetary policy tool in its armoury less.
Negative returns from the money market is a revelation that is here to stay.
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