More than $3 billion dollars are being yanked out of money market funds (MMF) investing in short-term fixed income amid overall skepticism in Korean debt market, hardening immediate liquidity woes of many Korean companies despite unprecedented easing and stimuli actions from authorities.
The yield on the 91-day commercial paper of a single-A rating jumped 17 basis points from the previous session on Thursday to close at 2.04 percent, according to the Korea Financial Investment Association.
The short curve failed to come down despite the Bank of Korea’s rare “unlimited” bond-purchase program through repurchase agreement operation or repo every week until June.
Against Tuesday when the government announced to inject 7 trillion won ($5.8 billion) into the short-term money market, the yield soared 39 basis points. The spread with the policy rate of 1.00 percent has widened to more than 129 basis points.
The hike in CP yield which moves in the opposite direction of price stems from capital run from money-market funds that invests of debt of short horizon and low volatility, according to market experts. MMF is a type of mutual fund that invests in highly liquid short-term debt securities such as commercial paper issued by A-graded corporations and government bonds.
In just over a week, nearly 10 trillion won were withdrawn from the MMFs with the bulk or 9.3 trillion won pulled out by institutions. The assets under management of MMFs shrank to 136.9 trillion won on Tuesday, March 24 from 146.5 trillion won on March 16, when the BOK made an emergency rate cut of half a percentage point to place the key interest rate at historic low of 0.75 percent. On Tuesday alone, investors took out 4 trillion won from MMFs despite the government’s announcement of the bond market stabilization program.
“The phenomenon underscores how companies are running short on cash,” said a bond market specialist.
Investors are also making shifts within the MMF market, seeking safety over higher returns. MMFs investing in government and municipal bonds typically yield 0.9 percent per annum while prime MMFs investing in shorter-term debts like three-month commercial paper yield over 1 percent. But even financially strong companies are transferring their funds to the lower-yielding MMFs, said the bond market experts. Even pension funds have reportedly tapped big withdrawals.
By Ahn Gab-seong, Hong Hye-jin, and Cho Jeehyun
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