Fitch: Japanese MMFs Likely to Face Negative Yields, Outflows
OREANDA-NEWS. The decision by most Japanese money market funds to halt subscriptions may delay but is unlikely to prevent their yields turning negative, Fitch Ratings says. When this happens, significant outflows are likely and these could be initially severe if the market follows the same trend as European MMFs.
The Bank of Japan's surprise decision to adopt negative interest rates in January has pushed bond yields down again, with the yield on benchmark 10-year government bonds briefly turning negative earlier this week. Refusing to accept new money from clients will reduce the amount MMFs need to invest at these ultra-low yields and should keep the average return across their portfolio positive in the near term. Fee reductions and waivers are another way that funds may keep returns positive for investors. But under negative interest rates, it is almost certain that money fund yields will turn negative at some point.
European MMFs faced widespread and in some cases severe outflows when their yields turned negative last year. HSBC Euro Liquidity Fund was the first prime fund to announce negative yields, and its assets dropped by almost 50% in one month from EUR4.4bn on 27 March 2015 to EUR2.4bn on 1 May 2015. However, money did eventually flow back into European funds as investors failed to find palatable, positive yielding alternatives - at end-January 2016 the same fund was back up to EUR3.6bn in assets under management.
We may not, however, see the European experience repeated as MMFs are not as widely used in Japan. MMFs represent around 10% of the total mutual fund sector in Europe, but only slightly more than 1% in Japan. The Japanese MMFs are already suffering outflows, in contrast to the positive 2015 flows into European MMFs - even in euro funds.
The small size of the Japanese MMF market means managers may be more likely to opt to redeem funds and return cash to investors. Nikko Asset Management has already announced plans to redeem two funds ahead of schedule.
A practical issue is that Japanese funds may not yet be equipped to handle negative yields because the Bank of Japan's rate move came as a surprise to many market participants. In contrast, European money funds had considerable time to prepare, enabling them to implement new features such as unit-cancelling mechanisms to accommodate negative yields well in advance of them going below zero. If halting subscriptions buys time, this could give Japanese funds the opportunity to make changes, potentially using European fund structures as a template.