FOR PROFESSIONAL CLIENTS AND, IN SWITZERLAND, FOR QUALIFIED INVESTORS ONLY.

Negative rates in the US unlikely: how Money Market Funds weather the possibility

Can Money Market Funds Weather When a central bank considers lowering interest rates below zero, Negative Rates? the goal is to incentivize banks to lend money to influence spending

From 2009–2015, money market by businesses and consumers to spur economic growth. The impact funds operated in a zero or near of the COVID-19 pandemic and its effect on the economy has many zero interest rate environment. now inquiring as to whether the US may be headed into a period While we believe it is unlikely that policy makers will seek to lower of negative interest rates as the Fed Funds target rate is effectively interest rates into negative territory, between 0–.25%. To this question, we believe the answer is that it is only prudent as business currently such a move by the Federal Reserve is unlikely for leaders to be prepared and contemplate various tools that may several reasons: be implemented in such a scenario. The Fed’s recent rate cut to 0-0.25%, with the introduction of a wide range These tools are: 1 of unconventional policy measures, can imply that policy makers view Fee Waivers: Should a low yield or negative rates as a last resort measure. A case in point is the central negative interest rate occur over bank’s willingness in March 2020 to swiftly implement/reintroduce a prolonged timeframe (where a stimulus programs to counterattack the anticipated economic impact of fund’s gross yield is insufficient the COVID-19 pandemic. to cover fund expenses and/or generate a positive yield), a fund There was unanimity in the October 2019 Federal Open Market Committee may implement temporary, partial 2 (FOMC) meeting minutes that “all participants felt that negative interest fee waivers to generate a positive rates currently did not appear to be an attractive monetary policy tool in or zero yield in an effort to keep the United States.” The same conclusion was repeated in February/March the fund’s net asset value at 2020 by Chairman Powell as well as a number of other FOMC Members $1.00 per share. including Mester, Kaplan, and Kashkari.

Floating NAV: Reflect the fund’s The US Treasury will need to finance the new stimulus programs through negative interest earnings in the 3 the significantly increased issuance of Treasury securities. The share price by converting the fund’s unprecedented amount of new Treasury borrowing makes negative rates constant net asset value (NAV) of very unlikely, barring a major monetary policy shift from the $1.00 per share to a floating NAV Federal Reserve. per share, as calculated out to 4 decimal places.1 In some cases, a fund’s trading deadline may need to be modified to earlier in the trading day to support the processing of same-day shareholder activity.

1 Money market mutual funds may be classified as retail, government or institutional. Retail and government funds are permitted to maintain a constant NAV, while institutional funds generally must maintain a floating NAV. Reverse Distribution Mechanism (RDM; also known as Share The evidence of the stimulative effect of negative interest rates to an Cancellation): To keep a fund’s NAV 4 economy is mixed. Experience with negative policy rates in Japan and at a constant $1.00 per share, a Europe does not provide conclusive evidence that negative policy rates fund’s negative dividend rate could restore confidence and economic activity. In fact, negative rates in Europe potentially be passed to investors have reduced credit creation in the real economy which has impacted by reducing the equivalent number liquidity in short-term funding markets as well as longer duration fixed of shares held by each shareholder income securities. on a daily basis. Negative rates may bring forth a false sense of the cost of credit which When money market funds 5 could lead to a loosening of financial conditions, thereby creating distribute dividends, they are often unintended consequences such as market bubbles, excessive inflation, or reinvested to purchase new fund exacerbating currency wars. shares. Under RDM, the process is reversed on days that the fund yield is negative, meaning shares 2 are cancelled instead of purchased. Dreyfus CIS continue to believe that a negative short-term interest rate policy is There is no formal regulatory unlikely from the Fed. At the same time, we do believe that groundwork on systems, guidance on whether or how RDM regulatory and logistical issues should continue as a matter of prudent planning. In may be used for negative dividends. the unlikely case of negative rates, as we have seen in Europe, we believe the money However, RDM or share cancellation fund industry can adapt and continue to provide the shareholder benefits of market- was previously utilised by European rate returns, daily liquidity and ease of trading. money funds prior to 2019.

Reverse Stock Split: The number of fund shares held by shareholders would be reduced while their value would be proportionately increased in an effort to maintain a constant NAV share price.

While a reverse stock split is a tool that is generally available for registered investment companies, this option has not been deployed by money market mutual funds in recent history. Funds considering the use of reverse stock splits would need to confirm that this approach is feasible from both operational and regulatory perspectives. 2 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.

IMPORTANT INFORAMATION

For Professional Clients and, in Switzerland, for Qualified Investors only. Any views and opinions are those of the investment manager, unless otherwise noted and is not investment advice. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. Dreyfus Cash Investment Strategies is a division of BNY Mellon Investment Adviser, Inc. Issued in the UK by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. Issued in Switzerland by BNY Mellon Investments Switzerland GmbH, Talacker 29, CH-8001 Zürich, Switzerland. Authorised and regulated by the FINMA. Issued in Europe (ex-Switzerland) by BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML), a public limited company (société anonyme) incorporated and existing under Luxembourg law under registration number B28166 and having its registered address at 2-4 Rue Eugène Ruppert L-2453 Luxembourg. BNY MFML is regulated by the Commission de Surveillance du Secteur Financier (CSSF). MAR001395 Exp: 17 August 2020 T8990 07/20