New MMF regulations, taking effect in October of this year, are having major negative consequences for issuers and borrowers of debt held by money market funds. Specifically, Tax-Exempt MMFs (TE MMFs) are closing and assets are leaving. This is drying up a very important municipal financing conduit.
As TE MMF funds close (or shorten their maturities), municipalities have fewer buyers for their debt. Even when they are able to place issues with the remaining TE funds, due to the shortened maturity structure, they are less able to lock in rates and more subject to weekly rate resets. This increases volatility and adds to their borrowing costs. If they are not able to place their issues with TE MMFs, only two options are available. They must turn to other lenders that have higher transaction costs or charge higher rates or they must defer or cancel infrastructure, educational/healthcare facilities or other municipal projects.
This paper will show the following, all of which demonstrate the negative impacts on municipal financing of new MMF regulation:
- Tax-Exempt MMFs are closing
- Remaining TE funds are shortening maturities
- Managers that use TE funds on behalf of their customers are exiting those funds