U.S. prime money-market mutual funds may face lower yields and fewer investment choices in the market for borrowing and lending securities if the Federal Reserve restricts collateral options, according to Fitch Ratings.

A further reduction in short-term interest rates may make it even harder for the $2.6 trillion money-market fund industry to retain customer assets. Record low rates since late 2008 amid unprecedented central-bank monetary stimulus have put pressure on the industry, whose assets fell 31 percent in the past two years as of last month.

The Fed said on Feb. 15 it will boost its oversight of reform efforts in the $1.6 trillion tri-party repurchase agreement, or repo, market and will consider restrictions on the types of collateral that can be used. The 10 largest U.S. money funds eligible to purchase corporate debt, which account for more than 5 percent of the market, have raised over the past year their allocation to higher-risk collateral, such as corporate debt, stocks and structured finance, Fitch said.

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