(ATF) Many commercial banks have chosen to redeem their currency funds as arbitrage space with deposit certificates narrows, Oriental Fortune News reports.
Previously, money funds not only faced falling yields, as the bond market adjusted, but the yield on deposit certificates also rose. But industry insiders quoted by the paper said institutional investors’ fund movements have since changed.
“In April, the average seven-day annualised return on currency funds was around 1.8%, while the one-year CDB maturity yield on AAA grade China Bond commercial banks fell to a minimum of about 1.6%. Some commercial banks issued certificates of deposit, buying currency funds on the asset side, and taking the middle interest spread,” a fixed-income fund company source revealed.
“Since June, the annualised yield on currency funds has fallen to 1.5%. With the adjustment of the bond market, the AAA grade China Bond – a commercial bank has a one-year certificate of deposit – the yield to maturity rose to 2.4%. (So) the arbitrage space disappeared, and some city commercial banks began to redeem money funds.”
Another bond fund manager said commercial banks had indeed sought to arbitrage certificates of deposit.
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“Commercial banks issue certificates of deposit with a yield of about 1.6%,” the manager said. “The funds are invested in currency funds, which in turn buy commercial bank certificates of deposit. The bank not only earns a spread but also expands its scale.”
The bond-fund manager also said the arbitrage spread between the certificate of deposit and the money fund mainly benefited some city commercial banks.
“Large-sized banks are too large, and the profits brought by arbitrage can hardly be reflected in their profit statements,” the manager said. “Therefore, large commercial banks have insufficient incentives for arbitrage, and currency funds mainly invest in AAA and AA+ rated interbank certificates of deposit, with ratings below AA+.
“For small commercial banks, the deposit certificate issued cannot meet the investment requirements of currency funds, and the benefits for small banks are very limited. But for some city commercial banks, arbitrage is more obviously for profit.
“Earlier this year, the deposit rate fell too fast,” the manage added. “Now with the bond market adjustment, the one-year deposit yield has returned to around 2.4%, and arbitrage cannot continue,” the bond fund manager said.
However, some in the industry believe there has been a history of inverted deposit certificate interest rates and currency fund yields, but this is not expected to result in large-scale redemption of currency funds.
Arbitrage is the behaviour of just a few institutions and not a common phenomenon in the industry. Moreover, the interest rate on deposit certificates issued by small city commercial banks is generally higher than that of large commercial banks, and the actual arbitrage space is not so large.
According to Dongcai Choice data, as of June 19, the average seven-year annualised rate of return on monetary funds this month was 1.489%, and the one-year deposit receipt maturity rate of AAA grade China Bond commercial banks was 2.3851%.
Throughout April, the average seven-day annualised return of the money fund was 1.8429%, and the one-year certificate of deposit maturity of the AAA-grade China Bond commercial bank was around 1.6%.
According to the May public fund market data released by the Fund Industry Association, the total value of public fund assets was 17.64 trillion yuan, a decrease of 139.304 billion yuan from the previous month. Of this, the total size of the currency fund was 8.43tn yuan, and the net redemption was nearly 200bn yuan; the total scale fell by 2.25% month-on-month, and became the main source of fund size shrinkage in May.
According to the bond fund manager, money funds have also continued the redemption trend this month. The arbitrage space has basically disappeared but the yield on money funds is still low.
In the opinion of a large fund company’s fixed-income source, the main reason for the reduction in the size of the currency fund in June has been institutional liquidity management demand at the end of the quarter and the decline in yields on currency funds.