January 26, 2009 / 5:16 PM / 11 years ago

J.P. Morgan sees US Treasury fund assets shrinking

NEW YORK, Jan 26 (Reuters) - The Federal Reserve’s near zero percent interest rate policy has resulted in a massive withdrawal from money market funds that invest only in safe but low-yielding U.S. government securities, J.P. Morgan Securities said on Monday.

J.P. Morgan analysts predicted assets in Treasury-only money market funds could shrink 50 percent by the end of 2009 from its peak of about $760 billion in December.

“The pace of asset declines at Treasury Only funds accelerated into year-end and continues to decline in 2009,” J.P. Morgan analysts Alex Roever and Cie-Jai Brown wrote in a report published on Monday.

In about a month, assets in Treasury-only money funds have fallen approximately $100 billion or 13 percent, according to iMoneyNet.

Since the Fed’s adoption of near zero interest rate policy (ZIRP) in December in an attempt to revive economic growth, short-term U.S. rates including those on Treasury bills have plummeted. The rates on one-month to one-year Treasury bills, which Treasury-only money funds could own, ranged from 0.03 percent to 0.45 percent as of midday Monday.

Prior to the Fed’s unprecedented rate move, investors had flocked into Treasury-only money funds in hopes of shielding their money from the wild swings in stocks and other risky assets which have been hammered by the global downturn and credit crisis.

With safe but short-term Treasury bills rates running at these historic lows, investors which have slightly more risk appetite have favored government/agencies money funds that can purchase higher-yielding securities issued by mortgage finance agencies Fannie Mae FNM.P, Freddie Mac FRE.P and Federal Home Loan Bank system, the analysts said.

“This distinction has not only allowed them to survive the onset of ZIRP, but over the past month assets have grown, cannibalizing the Treasury Only cash,” the J.P. Morgan analysts said.

These government/agencies money funds on average hold more than 70 percent of assets in agency securities, some of which are yielding 95 basis points above the Overnight Indexed Swap (OIS) rates or the market’s expected Fed policy rates.

The three-month U.S. OIS was traded at about 0.20 percentage point midday Monday.

Reporting by Richard Leong; Editing by Diane Craft

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