Negative Interest Rates Already in the USA

The definition of insanity is doing something over and over again and expecting the same result. Albert Einstein

Many of us who have surplus short term liquidity use money market funds to invest.   So do corporations.

But what happens when money fund rates turn negative? Think that won’t happen?  I have news for you.  Technically, it already has.  While euro deposit rates have long been negative, and many other OECD countries are using negative rates as a form of stimulus, it appears North America has avoided this.

Chart of European Libor Rates


Not so fast. Major U.S. money market fund providers like TIAA-CREF have already announced plans to stop providing fee waivers as new regulations force fund type consolidation, which will create negative rates in the safe, liquid funds that remain. It’s baked in and it’s going to happen.

Back on August 31, 2009, TIAA-CREF waived their expenses

In response to low interest rates in the marketplace that have depressed money market yields, TIAA-CREF is waiving some expenses on our proprietary money market products.

A portion of the distribution expense for the CREF Money Market Account has been waived in an effort to keep its 7-day yield positive.  For the TIAA-CREF Money Market Fund (Retail Class) part or all of its distribution expenses are being waived to keep its 7-day yield positive. And for the TIAA-CREF Money Market Fund (Retirement Class) part or all of the service fee is being waived in an attempt to keep its 7-day yield positive.

Please note that in all three instances, these fee waivers can be discontinued at any time.

CREF Money Market Account: Beginning July 16, 2009, part or all of the 12b-1 distribution fees for the CREF Money Market Account are being voluntarily waived. Without this waiver, the 7-day current and effective annualized yields and total returns would have been lower.

And that important note about fee waivers can be discontinued, well, it has now. And when rates go negative, imagine the principals investors have been taught that go out the window. The biggest force in investing is compounding. Well now, with negative rates, I am destroying capital. I am now charged money for saving it in a fund with government obligations. I have been saying for close to 8 years bank deposits will someday be an insurance product. But the idea that borrowers are actually rewarded and savers penalized, its hard to take. Think about it, IBM may be able to float a negative rate bond.

This is a very dangerous game that is being played out. Its all driven by fear of Central Bankers avoiding the very painful alternative.   James Bullard, President of the St Louis Federal Reserve, says so much in a paper outlining their views on how the narrative has changed from one that emphasized eventual convergence to a single, long-run steady state to one focused on unpredictable regimes.  It makes for an interesting read.

Corporate treasurers beware. There are answers and alternatives out there, but you can’t find them today on Bloomberg. Not yet.

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