In the latest sign of fallout from the Federal Reserve’s attempts to support the economy through the COVID-19 pandemic, The Vanguard Group has closed to new investors its $39.5 billion Treasury Money Market Fund (VUSXX).
The move follows a similar decision by Fidelity Investments, which announced a soft close on three Treasury money funds at the end of March.
The closings are touted as being in the best interest of investors, and in some respects, they are, but it also protects the asset managers from having to subsidize the funds just to keep yields positive.
The money managers are hoping to avoid a repeat of what happened 12 years ago, during the financial crisis, when the Fed cut rates to zero and so much money flooded toward the safety of Treasury money funds the portfolio managers were forced to keep buying Treasuries at lower yields.
“The point here is the Treasury fund is the one most sensitive to interest rates and is going to hit 0.01% the fastest, and they don’t want to start waiving fees,” said Daniel Wiener, editor of The Independent Adviser for Vanguard Investors.
“They are trying to protect the yield,” he added.
Fund companies that are closing Treasury money funds are still offering access to money funds with broader mandates that can buy commercial and mortgage paper.
“On the surface and at face value Vanguard believes it is acting in the best interest of shareholders and that’s their job, but I also wonder if they are trying to push people into their other money market funds,” said Paul Schatz, president of Heritage Capital.
“This is also something that would occur near a peak in the Treasury bond market, and that’s probably the most important takeaway,” he added.
Vanguard spokesperson Freddy Martino said the decision to close the Treasury fund to new investors boils down to the fact the fund is made up mostly of Treasuries and yields have been driven down.
“As new money comes in and is put to work, more Treasuries have to be purchased,” he said.
Vanguard closed the fund in 2009 after the Fed cut rates to zero and didn’t reopen it until 2016.
At Fidelity, the Treasury money funds were closed in 2008 and reopened in 2010.
“While all of our money market funds have managed recent inflows well, with the recent reduction in the federal funds rate and yields on Treasury securities at historic lows, Fidelity believes that limiting inflows into the Treasury money market funds will help preserve the returns of existing fund shareholders,” said Fidelity spokesperson Adam Banker.
“We will reopen the funds to new investors when we determine it is appropriate,” he added.
The reason Treasury funds are being singled out is because they represent the ultimate in safety, which means they will likely continue to see strong inflows until investors start to believe the economy is out of the woods.
According to Crane Data, government money funds experienced inflows of more than $790 billion last month, which more than doubles the $325 billion that flowed into the products in September 2008, the month the Reserve Primary Fund saw its net asset value per share drop below a dollar.
“It’s a big deal when the funds with assets 100% guaranteed by the U.S. government, which is the safest credit in the world, aren’t available for investment,” said Dennis Nolte, vice president at Seacoast Investment Services.
“However, since the Treasury is now wedded to the Federal Reserve and the Fed seems to be buying all risky credit assets perhaps there isn’t any risk,” he added. “People are going to have to go out further on the risk spectrum with funds generally designed for liquidity and safety. And that’s never insignificant.”