Money market funds are moving out of corporate securities due to an obscure rule change that requires them to mark their assets to market. Money market funds that hold government securities are exempt from the rule. It's no surprise that money funds are dumping corporate securities to buy government-backed paper. One index of short-term rates for corporate borrowing -- LIBOR -- has surged as money funds rotate into Treasury bills and other, safer assets.
In this clip from Industry Focus: Financials, The Motley Fool's Gaby Lapera and contributor Jordan Wathen discuss how the rule change affects money market funds, and why it's a good thing for bank earnings.
A full transcript follows the video.
This podcast was recorded on Nov. 7, 2016.
Gaby Lapera: The other thing that made news while I was gone, according to Jordan -- this is not the most exciting news, but we feel as if we should cover it -- is that the money market fund rules have changed.
Jordan Wathen: [laughs] Yeah, it's not the most exciting news; it's not supposed to be. If you own a money market fund, you might have gotten a letter. Basically, what happened was, the government changed the rules on money market funds so that if they invest in private securities -- so, debt issued by companies -- they have to mark, basically, their assets to market. If they invest in government bonds, they can basically keep their $1 share price that they know and love. What's happened as a result of this is that all this money, billions upon billions of dollars, has gone into government bonds that used to be invested in corporate bonds. So now, corporations are spending more than they ever have to borrow short-term money. It's created an inefficiency in the market, at least for the short term.
Lapera: Yeah. So, although this sounds boring on the surface, it will be interesting to see how this shakes out long term for companies, because they've basically been cut off from a cheap source of short-term funding. So, we're going to see how they react to that. But that's something that's going to become more apparent in months from now. Right now, it's kind of a boring story.
Wathen: Right, it's a boring story. It's good news for bank earnings, because LIBOR, which is the index for short-term interest rates, has gone up, so floating rate loans that are based on that index have produced more interest income than they otherwise would have. So, that kind of gave you a little pop in bank earnings.
Lapera: Yeah, which is the most exciting news. I guess, if you're listening to this podcast, bank earnings must be exciting to you.