Negative yields could be a possibility for U.S. investors sooner than expected—at least, for investors in a couple of money-market products managed by TIAA.
In a notice to investors this week, TIAA said it plans to temporarily waive fees on the CREF Money Market Account and TIAA Access’s Money-Market Fund. Because U.S. interest rates have dropped to near zero, even the products’ low fees would cause investors to lose money in those investments. This was common practice during and after the financial crisis, when rates were similarly low.
But notably, TIAA said it would not renew the waiver after the end of 2020. What’s more, it said it could recoup those waived fees as soon as next year, if U.S. interest rates rise far enough to provide a positive yield.
“That’s a horrible deal,” said Dan Wiener, co-founder of Adviser Investments and editor of the Independent Adviser newsletter, who circulated the announcement in a note Friday evening.
TIAA did not immediately respond to requests for comment.
“To help avoid negative returns for CREF Money Market Account investors, TIAA is providing a limited and short-term waiver of account expenses. This waiver is currently in place no later than Dec. 31, 2020, to the extent necessary to keep yields positive and will not be renewed,” the firm said in the email to investors.
In other words, investors could lose money in those accounts next year if interest rates stay near zero. And when rates rise, TIAA said it may take a cut of yields to recoup the fees it is waiving this year.
TIAA’s notice marks a significant change from the way most money-market funds managed near-zero interest rates in the years after the 2008-09 financial crisis. Most funds waived fees as long as interest rates were near zero to avoid negative yields.
“People are going to freak out if they see [negative yields], so the fund companies began waiving fees,” Wiener says. “That was what you saw on almost every money-market fund, taxable or tax-exempt. Yields of 0.01%, just to stay above zero.”
In its announcement, TIAA said it consulted with regulators before deciding to only temporarily waive fees. It also encouraged investors to “consider possible alternatives.” Both the $12 billion CREF Money Market Account and the $2.3 billion TIAA Access’ Money-Market Fund are part of the firm’s variable annuities. “Having the limited and short-term waiver in place provides you with time to consider your options and to talk with your financial advisor,” the firm said. The firm’s variable annuity products allow investors to put their money into other accounts and funds, though neither the CREF nor the Access options appear to have other money-market investment offerings.
The $4.8 trillion in money funds provides liquidity for individuals and businesses. It was one of the first moves the Federal Reserve made in March, to ensure that companies would be able to do business during the pandemic.
The Fed’s $800 billion effort was aimed at so-called prime money-market funds, which do not have to adhere to the fixed $1 per share that money-market funds used to. In 2016, the SEC separated money-market funds into two groups—retail funds, which were allowed to keep the longstanding $1 per share value so long as they only held government-issued securities, and institutional prime money-market funds, which would have a floating net asset value (NAV), based on the value of the underlying securities. That means prime funds can break the buck, or fall below $1 per share, if the short-term debt market sells off. All these changes were aimed at protecting investors from losing money in these ostensibly safe funds. The two TIAA money-market products hold government securities.
There have been record-setting inflows of cash into government money-market funds (and out of corporate and municipal bond funds) during the selloff sparked by the coronavirus pandemic. Net weekly inflows totaled $1 trillion for March and April, according to Lipper Refinitiv. The week ended May 20 was the first net outflow since the beginning of March, and investors only withdrew $1 billion.
The robust demand has further weighed down yields in those products, and negative yields have become a point of focus for markets. For much of May, derivatives markets have been implying that U.S. interest rates could fall below zero in 2021.
“In the money-fund space, people are thinking seriously about negative yields and how they might handle them. The last go-round we merely saw fee waivers, so yields stayed positive,” said Pete Crane, founder of research and analytics firm Crane Data. “People are starting to think about what might happen if yields do go full-scale negative. And with funds, how they pass that through to investors—and how that’s perceived—will be a big deal.”
This specific threat of negative yields is in TIAA’s variable annuity products. Investors who hold the TIAA Money-Market Fund through TIAA’s Access variable annuity could end up losing money this year even with the fee waiver, the firm said, because of the extra fees imposed by the Access platform
Because variable annuity payments are calculated using a 4% Assumed Investment Return (AIR), the CREF Money Market Account must earn at least 4% for your income to remain the same. In recent years, due to historically low interest rates, the average annual return on the Account has fallen significantly below 4%—0.01% over the last five years, and only 1.07% over the past 10. Keep in mind that past performance is no guarantee of future results. Due to the low interest rate environment, you may want to take this opportunity to evaluate other available investment options that are appropriate for your long-term financial goals.
While the CREF Money Market Account is also in a variable annuity, investors likely won’t lose money on that portfolio—which manages $12.4 billion—until possibly next year.
Investors should now watch carefully to see how other money-market investment funds respond to interest rates near zero.
“This is the tip of the iceberg,” Wiener said. “There is a lot more of this coming.”
Write to Alexandra Scaggs at email@example.com