Among the most significant regulatory changes enacted by the money fund reform was the requirement that institutional prime money funds move from a fixed, dollar-per-share net asset value (NAV) to a variable NAV fund price. The change, intended to more accurately reflect the value of the assets in a money fund, raised concerns that 100% of the principal deposited in a money fund may not be available when redemptions were needed, if the NAV declined in value.
The record over the past three years has helped to allay these concerns. During this time, we have seen only incremental NAV movements, which have been more than compensated for by excess return from the yield differential between variable NAV prime money funds and fixed NAV government money funds.
Prime money fund NAV changes have been small and infrequent. We examined 27 funds since just after reform of December 2016. The largest price range in any fund over that period was 8 bps ($1.0007–$0.9999) and the smallest move was zero, or no move at all. With rare exceptions, when prime money fund NAVs move, they do so in increments of 1 basis point ($0.0001). We found 8 instances of a 2 bps ($0.0002) move, and we have not observed any that have moved more than 2 bps at a time.
This NAV stability has persisted even amid instability in short-term interest rates. In the three years since the new money fund rules went into effect, the Federal Funds Target Range has risen by 200 bps, and then fallen by 75 bps — the latter in just 4 months’ time. NAV stability has also been tested by other noteworthy events — such as unprecedented Treasury issuance, yield-curve inversions, volatility in the Libor-OIS spread (a proxy for credit conditions), quantitative tightening, and large-scale bond selling fueled by the 2017 tax cuts. Additionally, over the past 12 months, prime money fund AUM rose by more than $110 billion, putting pressure on portfolio managers to invest that cash while maintaining a stable NAV. On average, however, fund price changes have occurred only 1.7 times per month from December 2016 to November 2019. During the particularly volatile period of November 2018 to November 2019, the rate ticked up to 2.6 moves per month. Still, the prime money fund yield differential over government money funds more than compensated all but the shortest-term investors for these NAV changes.