Liz McCormick (NYSE:MKC)'s reporting via Bloomberg gives readers an update on the coming rule changes for money markets. We recommend it to interested readers.
Two additions may be helpful. First is pricing. Three-month LIBOR is 85 basis points. A year ago it was 30. That 55-basis-point increase was due only in part to the Fed. They raised rates 25 bps.
The other 30 bps was caused by a widening of risk pricing. Going forward, prime money markets are not going to enjoy the subsidizing effects of holding Treasury bills. They will have to stand on their own, and they may break the buck.
Government money markets will hold the buck under the new rules but will yield roughly the same as the Treasury bills they own, less any cost. They will be riskless for investors.
So the traditional blending of these two approaches will be severed by a clear regulatory wall. And the yields will reflect it. Want safety instead of yield? Use government. Want yield? Use prime and take risk.
After mid-October things will settle out and the spread between these two approaches will provide investors with market-based pricing of this risk differential. That choice will also allow investors to select an option that avoids some of the recent behavioral revelations of certain infamous banking operations.
We are watching risk pricing carefully. Separately, we expect the forthcoming Senate hearing that will grill a certain bank chairman to be revealing. If he knew, ugh! If he didn't, is his bank too big to manage? And what about the comp levels and retirement packages of those who had oversight?
So. Investors will have clear money market choices with a clear comparison of costs and returns against banks. Meanwhile, both the new rules and the Senate hearing are fuel in this highly incendiary political year.