Fidelity shuts three Treasury funds to new investors

Fidelity said it would stop accepting new money into three money market funds that invest in US Treasuries, as it sought to protect existing investors from the dramatic decline in interest rates since the outbreak of coronavirus. 

Assets in the three funds have soared by more than $23bn to $85bn during this month’s clamour for safe assets, and new money has had to be invested in increasingly low-yielding securities.

With some short-term Treasury debt even trading with negative yields, new investments could dilute returns for existing investors in the funds, Fidelity said.

In a note to investors seen by the Financial Times, the asset manager said that its Fidelity Treasury Only Money Market Fund, Fidelity Institutional Money Market Treasury Only Portfolio and Fidelity Institutional Money Market Treasury Portfolio would close to new investors from the end of Tuesday. 

“Restricting inflows will help reduce the number of new Treasury securities that the funds will need to purchase,” the investor note said. “That’s important because the newer issues generally have lower yields than the funds’ current holdings, and as such they would affect the funds’ ability to continue to deliver positive net yields to shareholders.”

The Federal Reserve abruptly slashed interest rates earlier this month as it sought to ease financial conditions and temper an escalating economic downturn sparked by the spread of coronavirus.

The move, amplified by investors seeking out the safety of government debt to shelter from a sharp sell-off across markets, has dragged the yield on three-month Treasuries to below zero, compared with more than 1.5 per cent in February. 

Money market funds that invest in Treasuries have been a particular favourite of investors seeking to keep their money in safe havens during the virus-related turmoil.

Assets in such funds have skyrocketed from $800m at the beginning of March to over $1tn, notching their largest one-month rise on record in data going back to the beginning of 2007, according to the Investment Company Institute. 

“The faster these funds take in new money, the faster returns head to zero,” said Pete Crane, who runs money market fund data provider Crane Data. “The only glimmer of hope is that the torrential flows into Treasury money market funds has some of them looking to shut their doors. Fidelity is doing this to protect existing investors.”

Existing holders of the three affected funds will still be able to add more money. The closures to new investors do not affect the rest of Fidelity’s range of money market funds which invest in Treasury and other government debt. Fidelity declined to comment beyond the note sent to investors. 

Subadra Rajappa, head of US rates strategy at Société Générale, said an expected deluge of new issuance of Treasury bills, to fund the record $2tn stimulus package agreed by US legislators last week, could change behaviour.

“Once you start seeing the supply surge, you might start to see money funds more willing to take in extra cash,” she said.