More U.S. Banks Curb European Funds

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According to Wall Street Journal, The Bank of New York Mellon Corporation (BK) and Northern Trust Corporation (NTRS) are the latest banks to join the list of key U.S. money-market funds managers to curb new investments in their European money-market funds. The step, taken by these banking giants, follows the European Central Bank’s (:ECB) announcement of interest rate cut last week.

ECB has slashed its benchmark rate to a record low of 0.75% after the economic data of Germany reflected a downside. Further, ECB reduced the deposit rate to zero.

These banks have stated that new investments would remain closed until the market stabilizes. However, redemptions of funds are open to the investors.

Reasons for Closure

Bearing the brunt of record-low interest rates globally and reduction in supply of debt following Europe’s sovereign debt crisis, money-market funds managers are striving hard to make profit by investing clients’ assets. Therefore, these managers decided to cut fees that are charged from customers in order to make their returns above zero and some of them opted to close down these businesses.

Northern Trust restricted new investments in its Dublin-based Euro Fund worth €2.6 billion ($3.2 billion). Similarly, BNY Mellon has constrained deposits in its BNY Mellon Euro Liquidity Fund worth €2.3 billion ($2.8 billion).

These banks took such a step in order to protect the interest of the existing shareholders. Restriction in investments will subdue yield dilution of the current clients. Further, the steps taken by these fund managers, to restrict or remove limitations, will depend on the economic environment in the upcoming years.

Similar Actions by Others

Last week, JPMorgan Chase & Co. (JPM) closed five euro-denominated money-market and liquidity funds. As of July 5, these funds had €23.7 billion ($29.2 billion) in assets. The funds that have been ceased by this bank include JPMorgan’s Euro Liquidity Fund (:JPMEULC), Euro Government Liquidity Fund, Euro Money Market Fund, Euro Liquid Market Fund and JPMorgan Series II Funds - EUR.

Likewise, The Goldman Sachs Group Inc. (GS) also restricted new investments in its GS Euro Government Liquid Reserves Fund. Further, BlackRock Inc. (BLK), world’s major asset manager, has constrained deposits in two of its European funds - the Institutional Euro Liquidity Fund and the Institutional Euro Government Liquidity Fund.

Previously, with $1.8 trillion in the U.S. mutual fund assets, Vanguard Group Inc. closed two of its money funds in 2009 for safeguarding the dilution of existing shareholders. The two funds - Vanguard Admiral Treasury Money Market Fund and the Vanguard Federal Money Market Fund - currently have around $18 billion in assets.

Boston-based Fidelity Investments also limited investments in four of its money market funds in December 2008. However, these were reopened in July 2010.

Conclusion

For a long time, the investors have been losing huge amounts of interest income. If this continues along with increasing regulatory pressure on the money-fund industry, it would be a huge blow to investors amidst the current economic downturn.

If the European crisis continues further, there will be significant impact on worldwide capital markets. On the other hand, the extremely low interest-rate environment is another manifestation of this uncertain macro backdrop. Concerns about the European finances and soft U.S. growth prospects have made treasury instruments the choice of the safe-asset class. As a result, the yields on benchmark treasury bonds are hovering at low levels.

We don’t expect the potency of the sector to return to its pre-recession peak anytime soon. In fact, the economic intricacies may even result in further disappointments in the upcoming quarters.
 

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