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Unchanging Public Debt

Updated: Apr 13, 2019

Constant NAVs are a prized dimension of money market mutual funds. A better understanding of the Constant NAV can be had by looking at this video.

In rejigging how the money market funds operate in the European Union, ESMA has created a category called the Public Debt Constant NAV fund. By insisting that not less than 99.5% of the assets in such funds goes into public debt, it of course ensures that the gap between the Constant NAV and the market value based NAV does not become too wide.

(This of course does not get into what happens if the public debt in question is of an economy like Greece or Italy, which has a history of serious volatility. We shall leave that for another day!)

There is a second category of “Low Volatility NAV” which is not as cast in iron as the PB CNAV. The curb on volatility here is by limiting the maturity of the instruments in which the fund may be invested to less than a year.

By contrast, in the USA, which carried out its money market funds reform in 2016, there are 3 categories of stable funds. Predictably, one category is government debt only in its investment focus. Given the anticipated stability there is no redemption fee or redemption gate for such funds.

Funds that invest only in municipal / tax-exempt paper are also considered stable, though the turmoil in the municipal paper market is comparable with Italy and Greece.

Finally, a third category is of funds which is to invest only in Prime securities.

Given the advantages of the Constant or stable NAV it remains to be seen how the assets will get redistributed among the newer mandated categories in the USA.

Early data from the USA has shown that investors preferred to move into the government debt stable NAV funds, away from prime funds. (St. Louis Fed research paper.)

Let us keep an eye on this space to see if investor preferences in the EU are any different.

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