Unlikely booster for money market funds: beat-up Puerto Rico bonds

martes 5 de agosto de 2014 16:20 GYT

By Tim McLaughlin

BOSTON Aug 5 (Reuters) - Money market funds run by Fidelity and American Beacon are relying on an unlikely source to juice up their returns: beat-up bonds issued by cash-strapped Puerto Rico.

The funds have accepted the U.S. territory's debt as collateral on their short-term loans to Wall Street banks, and in exchange for that added risk are receiving a higher interest rate, according to public filings.

As a result, American Beacon's $767 million fund has one of the best one-year returns in the industry, while Fidelity this year used at least one loan backed by Puerto Rico bonds to generate a yield about 20 basis points higher than U.S. Treasuries or bank certificates of deposit.

The strategy comes as the money market fund industry seeks to retain investors spooked by new U.S. regulations, and could stir up worries about market risk that emerged after the 2008 financial meltdown, according to analysts.

So far, repurchase agreements backed by some of the riskiest collateral make up just 3 percent of the $2.4 trillion in taxable money market fund assets, according to research firm Crane Data LLC. But that could grow if the improved returns among those using riskier collateral prove to be a draw for investors.

The American Beacon Money Market Select Fund, for example, has nearly a third of its repurchase agreements backed by riskier collateral. As payoff, the fund's one-year total return of 0.08 percent through the end of July is better than 91 percent of peers, according to data from Lipper Inc, a unit of Thomson Reuters. The fund's five-year annualized total return of 0.21 percent, as of Dec. 31, also beat nearly 90 percent of peers.

In recent months, the American Beacon fund has used a $39 million repurchase agreement with RBC Capital Markets LLC to generate a yield of 18 basis points. In April, the collateral in the deal contained about $6 million worth of Puerto Rico bonds, including ones issued by the island's electric authority.

Standard & Poor's said last month the Puerto Rico Electric Power Authority is likely to default on its credit lines and file for protection under a new restructuring law. PREPA bonds were not listed as collateral in the fund's end-of-May report, though.   Continuación...