Money market funds face soft closures

PadlockThe European Central Bank's decision to stop paying interest on its deposit facility will lead to the temporary closure of some funds to new investments, followed by fee reductions to keep returns positive, Fitch Ratings warned.

“While these actions will help protect existing investors from potential negative yields, we believe the high cost investors pay for liquidity in the current environment could increase the demand for products that have a longer investment horizon,” a statement by the ratings agency said.

“Some funds may opt for more flexible investment strategies to meet these demands and avoid negative yields.”

Fitch said having deposit rates at zero would push the euro overnight index average to “historical lows” and money market funds’ yields may turn negative.

With interest rates at record lows, investors are paying a particularly high cost to hold highly liquid portfolios.

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