U.S. money market reforms take effect today
U.S. money market reforms take effect today as the SEC's rule 2a-7 will require prime money market funds to float their net asset value (NAV), while government-only money market funds will remain exempt. This was aimed at liquidity traps following the Lehman showdown that impacted short-term corporate funding, as firms typically put their cash to work at the short-end for at least marginal returns. The jury is out on the immediate impact, with some predicting prime funds will recover after the fact, while others suggest that the exodus from prime into government-only funds will continue after some $1 tln shifted already. In either case, it comes at an awkward time with the Fed on the brink of another hike and 3-month Libor already near 7-year highs, having risen above 0.88% today compared to 0.30% a year ago. Japanese institutions had been big prime buyers relative to negative domestic yields before the regulatory shift, and it's possible they could return if attracted by returns stretching nearly to 1%, relative to 0.18% on government-only MM funds. This has also been a source of cheap funding that has dried up for firms issuing CP and bank debt held by prime funds.