Bloomberg News

Pimco Retreats From Euro Money Market on Negative Yield Risk

October 24, 2012

Pacific Investment Management Co., the manager of the world’s biggest bond fund, is pulling back from Europe’s short-term money markets because of the risk of losing investors’ cash.

Pimco closed its 80 million-euro ($104 million) liquidity fund yesterday because record-low interest rates threatened its so-called stable net asset value, according to Michael Story, the firm’s London-based global product manager.

Euro-denominated money funds have been turning away clients, extending the maturity of holdings or waiving fees after the European Central Bank cut its deposit rate to zero on July 5, pushing down yields on the short-term debt to which the funds are restricted. Bank of America Corp. (BAC:US) and SMBC Nikko Securities Inc. also closed euro money-market funds.

“It was the low-yielding cash environment that was the driver of the closure,” Story said in a phone interview. “It was difficult to maintain the stable net asset value considering that the market began charging negative yields on many cash instruments.”

The low yields on the safest debt means funds that invest only in government instruments are generating no surplus cash, according to research firm iMoneyNet Inc., putting them at risk of losing their clients’ investments or “breaking the buck” as it’s known in the U.S.

Fees Waived

Pimco told investors of the decision to liquidate the fund last month after it waived fees. The fund, which held short-term agency and government bonds and bank-issued repurchase agreements, kept a maximum average maturity of 60 days.

The Newport Beach, California-based manager will focus on its euro short maturity fund that has 278 million euros under management, and its euro MINT exchange-traded fund that has 78 million euros under management, Story said. Both funds have a variable net asset value.

“Our other funds can invest in slightly longer-maturity instruments,” Story said. “That gives us a little bit more of the yield curve to play with.”

On average, euro money market funds returned 0.04 percent in the week ending Oct. 19, according to iMoneyNet.

JPMorgan Chase & Co. (JPM:US) is replacing two stable net-asset value euro money-market funds with new share classes that automatically reduce the number of shares if total assets drop, an action that isn’t allowed under the funds’ current rules. This means investors may get back less than they originally invested, the New York-based bank said last week.

“Corporate treasurers need a safe harbor for cash which money funds offer,” said Michael Eberhardt, a managed funds analyst at Moody’s Investors Service in London. “Managers are equipping themselves with the tools to operate funds in a negative yield environment.”

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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