Credit ripples reach supposedly safe cash funds
Turmoil in the credit markets is spreading to one of the most conservative kinds of investments, causing a small money-management firm to freeze its clients’ assets.
That move sent tremors through stocks as well as commodities, until now one of the few markets relatively untouched by recent worries.
On Tuesday, Sentinel Management Group Inc. — citing “panic” conditions in the market — prevented its clients from withdrawing money from their cash accounts. Sentinel manages money for hedge funds and commodities traders in what are loosely akin to money-market accounts: short-term investment vehicles that are supposed to behave something like a bank account.
Sentinel said in a letter to clients dated Monday that an inability to easily buy and sell securities in the credit markets was making it tough to price its holdings. “We are concerned that we cannot meet redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients,” the letter said. Sentinel didn’t respond to requests for comment.
It is the latest sign that the bond-market turmoil is hurting even investments considered among the most conservative places to temporarily park cash.
Buyers for some debt instruments — particularly in asset-backed securities and some subprime securities — have dried up in recent weeks. A general lack of liquidity such as this in global markets is what prompted central banks in the U.S. and elsewhere in recent days to open up emergency lending windows to help investors that suddenly found themselves squeezed by a shortage of cash.
The illiquidity is also hurting a handful of institutional funds and mutual funds that are marketed as “enhanced” money-market products, or funds that are slightly riskier than regular money-market funds and aim for higher yields.
For instance, State Street Global Advisors’ Limited Duration Bond Fund, a $2.8 billion fund catering to institutional investors, fell 11 percent for the month of July. One of State Street’s mutual-fund offerings, the SSgA Yield Plus fund, is down 5.5 percent for the three months and 4 percent since the start of the year through Monday, according to Morningstar Inc. Both products hold asset-backed securities including subprime-mortgage securities.
A spokeswoman for the company, a unit of State Street Corp., said “Market-driven events occur from time-to-time, such as the current liquidity constraints, that can affect segments of our investment portfolios, and we actively address these events working closely with our clients.”
Sentinel manages about $1.5 billion, according to CME Group Inc., parent of the Chicago Mercantile Exchange. It invests clients’ short-term cash holdings in securities ranging from U.S. government bonds to short-term bank time deposits.
Firms such as Sentinel play an important role in the commodities markets. It is one of a few niche providers of short-term cash-management services for clients in the commodities-futures trading business. It took in clients that included so-called futures clearing firms, which are institutions that execute a client’s trades on an exchange and stand behind the client’s obligations. Clearing brokers give futures traders confidence that they will be paid if they are owed money when a contract expires.
The Chicago Mercantile Exchange confirmed that some of its clearing firms were Sentinel clients. Sentinel’s clients also include a variety of firms that manage pooled commodities funds for investors.