Wednesdays interest rate cut to 1% may punish investors in money market mutual funds, whose average yields are expected to plummet to 44 basis points, the Los Angeles Times reports. Just before the cut, the average yield was 64 basis points.
In order to keep afloat, many firms will have to waive management fees, said Peter Crane, managing editor of iMoneynets Money Fund Report. There are 565 money market funds, with $309 billion or 15% of industry assets, which before the rate cut already were yielding 50 basis points or less, Crane noted. These funds are definitely going to have to waive their fees, he said. However, no money market fund manager has yet to leave the business, he added.
Money funds, which invest in the short-term debt of companies and government units, are often seen as an alternative to bank accounts. They hold an estimated $2.1 trillion in assets and have been around since the early 1970s.
Following the Federal Reserves policy beginning in 2000 of cutting interest rates, the return on money funds have significantly diminished.