Fund management groups are stepping up their attempts to lure conservative investors away from the $2.7 trillion money market fund industry, offering a rash of new vehicles that will buy only short-maturity bonds.
The new vehicles are being pitched as offering higher yields than money market funds with only a little extra risk.
The development comes as money market funds face significant cost pressures in the current low interest rate environment, which could rise further next year if a government guarantee on bank deposits is revised and if the Securities and Exchange Commission imposes additional reforms.
T Rowe Price this week became the latest fund manager to launch an "ultra-short" bond fund, which will invest in short-term government and corporate paper. Five other managers have launched similar funds in recent months, according to Morningstar.
Several managers have also asked for, or been granted, permission to launch ultra-short exchange traded funds, including Charles Schwab and Federated Investors, one of the top three money market fund providers.
"Money market vehicles are yielding, in some cases, only a handful of basis points," said Matt Tucker, managing director of U.S. fixed income at BlackRock's ETF business, iShares, which filed earlier this year to launch an ultra-short fund.
Money market managers have had to waive fees to maintain fund balances because short-term interest rates are so low. Some market participants are expecting further downward pressure on rates after the end of the year, if a government guarantee on bank account deposits over $250,000 expires as planned.
Part of the $1.4 trillion held in guaranteed accounts could move into other safe assets, such as short-term bonds or funds that invest in them.
"Investors might want to think about this fund as an alternative to their money market fund," said Joseph Lynagh, who will manage the T Rowe Price Ultra Short-term Bond Fund. "It is a conservatively run fund and it retains a lot of the features that give flexibility to money market funds, things like cheque-writing and no trading restrictions."
The managers launching ultra-short funds are also keeping half an eye on the opportunity that could arise if the SEC succeeds in its proposed reforms of the money market fund industry, imposing changes such as capital buffers or investor redemption restrictions.
An SEC report published late on Wednesday concluded that there would be little impact on borrowers from such changes, potentially softening opposition to new rules.
The push to launch alternatives to money market funds was welcomed this week by Moody's, the credit rating agency, as being positive for asset managers.
Henry Shilling, Moody's analyst, wrote that the development was "bolstering their fee income and potentially reducing their reliance on money market funds that could face capital set-asides to establish fund-level capital buffers under new regulations that seem now more likely to be adopted in some form".
BlackRock's Mr Tucker said the proliferation of ultra-short funds was "driven by investor demand and by questions of the future of money market funds. Investors benefit from an increasing number of investment options".