By Neelabh Chaturvedi
More euro-denominated money market funds may put temporary restrictions on new investments and cut the fees they charge to keep returns positive, ratings agency Fitch Ratings said Wednesday.
While these actions will help protect existing investors from potential negative yields, the high cost investors pay for liquidity in the current environment could increase the demand for products that have a longer investment horizon, Fitch Ratings said in a report.
"We expect to see a pattern of temporary soft closures continue across the sector. These tend to last until the current portfolio has matured and is reinvested at prevailing rates, at which point new investments no longer pose a risk of dilution for existing investors," the ratings agency said.
J.P. Morgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and BlackRock Inc. (BLK) have announced in recent days that they are closing their European money-market funds to new investments as secondary-market yields have dwindled.
Interbank lending rates in the euro zone, which are already at record lows, are expected to plummet further as the impact of the European Central Bank's cut in its deposit rate to zero starts to filter down.
Most overnight bank deposits will soon pay between minus 15 basis points and plus five basis points and there is a risk of money-market fund yields turning negative, Fitch said.
"In this environment, the decision by some funds to temporarily close to new investments is a prudent one to protect existing investors and will not have any direct impact on ratings," the ratings agency said.
(Anusha Shrivastava in New York contributed to this article)
Write to Neelabh Chaturvedi at [email protected]