Dividends and There’s a $300 billion exodus ahead with new money-fund era

For institutional investors, while they could park their money in the bank, they make a few more points buying commercial paper with short maturities. Those companies that have the highest credit ratings including banks issue paper for the short term financing. The money market has maturities less than a year and are backed by the creditworthiness of the company or government. The regulators in a bid to make the system safer is changing a 30 year rule. After October 14, institutional prime and tax-exempt funds will no longer fix share prices at a $1.00. Funds that only hold government debt will be able to maintain that level. If funds hold commercial paper, the price will be different. This means institutional money has to find new home and are chasing shorter maturities. Rather than 6 months, the maturities prior to October 14 has fallen to 10 days. The changes has meant the banks which issued commercial paper need to find another source and are using LIBOR (London interbank rate)  financing. The attract funding rates have moved upwards. The banks are making less, are they more stable?

As reported by Liz McCormick of Bloomberg News regulators try to design fail safe systems but they rarely anticipate to the degree the changes cause markets to move. Eventually things will work out, for now there is uncertainty in the marketplace.

Linking to dividend paying stocks, companies like certainty which is why all companies have lobbyists in state and federal politics. They need to watch out for changes and allow changes to happen, but not to create less consistent income. This is why things tend to happen slowly in government circles unless there is a crisis and a drive to make changes.

There are more questions than answers, till the next time – to raising questions.


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