Sunday, November 27, 2011

Low yields and the end of money funds?

The low yields on money funds are forcing more investors to move out on the yield curve to longer-term bond funds, but these funds do not provide risk-free rates of return. This is changing the risk profile of investor's portfolios and killing an industry. Investors will be taking on interest rate risk that they never expected with their money.

Money market funds cannot compete under this environment and the result will be money flowing back to banks and way from what has been called the shadow banking system. This could be what regulators and government wants, but it will change the forms of financing and will reduce the potential supply of loanable funds. The cost of business will go up for those borrowing money and the rate of return for investors will go down. 

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