WASHINGTON Feb 14 Money market funds have kept
an even keel since a new U.S. rule on their net asset values
went into effect last October, according to federal research
released on Tuesday, indicating that it may help create
stability in a market that experienced large runs in the 2007-09
Last Oct. 14, institutional prime funds, which mostly invest
in corporate debt, had to be in full compliance with the rule
requiring them to float their net asset values, or NAVs. Leading
up to the deadline, money raced out of prime funds into ones
invested in government securities, and policymakers and some
buyers grew anxious about long-term rockiness.
"Since NAVs began floating, money markets have been calm,"
wrote the Office of Financial Research, which is charged with
monitoring for system-wide risks. "The extent to which floating
NAVs might vary during market cycles will not be known until
money market funds again come under stress.
The rule was created to prevent runs on the funds seen
during the crisis when the NAV of a large money market fund fell
below $1 per share and spooked large investors into rapidly
pulling money from the funds.
So far, floating NAVs, which are market-based, have not
varied much from an even $1, said the research office.
"Some industry observers worry that variation in floating
NAVs might raise investors' concerns and still create runs," it
But it added that the market has not been under stress or
experienced outside shocks since the rule came on-line.
The largest variation in values it found was in the week
ending Dec. 16, when the Federal Reserve raised its target
federal funds rate.
The drop in NAVs by one or two basis by nearly half the
share classes the OFR tracked, though, was due to the typical
price decrease in fixed-income assets when interest rates rise,
according to the office. A rapid increase in interest rates
could create greater instability in floating NAVs, it said.
"The size of NAV movements also depends on a fund's risk
profile. Usually, prices of riskier securities - lower quality
and longer maturity - vary more," the office found, adding the
rule limits the amount of risk the funds can take.
(Reporting by Lisa Lambert; Editing by Bernard Orr)