(Yicai) Dec. 9 -- The seven-day yield of Tianhong Yu'ebao, the world’s largest money market fund, has dropped to a historic low of 1.27 percent, as a result of lower interbank deposit rates. Industry insiders expect this era of diminished returns to continue.

The fund’s seven-day annualized yield has declined by 106 basis points from 2.33 percent at the start of this year, reflecting both self-regulatory caution and decreasing deposit rates for financial institutions' short-term liquidity management, Yicai learned.

Launched in 2013, Tianhong Yu'ebao is an internet-based fund offered to users of Ant Group's mobile wallet Alipay. It invests in low-risk assets such as bank deposits, government bonds, and short-term securities. Having peaked at 6.7 percent, its yield has been sliding since the end of 2017.

The introduction of a self-regulation mechanism for rates on interbank demand deposits, along with a decline in these rates, has led to a decrease in the investment returns of money market funds, a public fund manager told Yicai.

The Self-Regulatory Mechanism of Market Interest Rate Pricing, set up by the central bank, recently recommended that non-banking financial institutions reference the seven-day reverse repo rate when setting interest rates. On Dec. 6, the seven-day reverse repo rate stood at 1.5 percent, the lowest since at least 2012, following two cuts this year.

The downturn is sector-wide. By Dec. 6, the average seven-day yield for 370 money market funds had fallen to 1.42 percent, a decline of more than 20 bips from June 30 and nearly 100 bips since the year began.

Industry insiders expect the low yields to persist for some time, and these funds may face higher liquidity risks, as a result of policy stimulus, a period of frequent bond issuance, and the decline in 10-year government bond yields.

Money market funds and cash management wealth products have CNY4 trillion (USD550 billion) and CNY2 trillion in interbank deposits, respectively, Kaiyuan Securities wrote in a recent research report. Due to their high liquidity requirements, they hold a larger share of interbank demand deposits compared with other types of funds and wealth management products. As a result, they are more sensitive to changes in yield, it added. 

Tianhong Yu’ebao had 763 million investor accounts as of the end of the third quarter, up from 760 million at the close of last year.

Editor: Emmi Laine