Is a Half-Trillion-Dollar Exodus on the Horizon for Money Funds?

Bank of America predicts $500 billion will leave money funds for short-term Treasuries within two years, in light of floating NAV requirement.

One of the biggest winners in the push to make money-market funds safer for investors is turning out to be none other than the U.S. government.

Rules adopted by regulators last month will require money funds that invest in riskier assets to abandon their traditional $1 share-price floor and disclose daily changes in value. For companies that use the funds like bank accounts, the prospect of prices falling below $1 may prompt them to shift their cash into the shortest-term Treasuries, creating as much as $500 billion of demand in two years, according to Bank of America Corp.

“We’re not really getting paid for the risks associated,” and the rules will make these funds even less attractive, Joseph D’Angelo, who oversees $70 billion as head of money-market fixed-income at Prudential Investment Management, said in a July 30 telephone interview from Newark, New Jersey.

Peter Crane, president of money-market researcher Crane Data LLC, anticipates fund values will remain stable because the underlying assets mature so quickly and are easily replaced. The shortest-term commercial paper comes due in two days.

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