Money Markets

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Money MarketsVery quietly, and without any of the fanfare with which it was announced a year ago, the government ended its safety guarantee for money-market mutual funds. Last Sept. 18, the Treasury Department’s Temporary Guarantee Program for Money Market Funds was allowed to expire. You might remember that in 2008, after the Lehman Brothers crisis, the huge Reserve Primary Fund suffered huge losses because it owned commercial paper issued by Lehman. When Lehman failed, its IOUs became worthless.

The basic premise of a money-market mutual fund is that one share is always worth $1 — one “buck.” But because of those commercial paper losses, the Reserve Fund “broke the buck,” as the value of a share fell below $1. At that point in the global credit crisis, it appeared there might be a run on all money-market mutual funds — more than $3 trillion in assets, much of which is held in short-term commercial paper. So the Treasury stepped in with a guarantee for all existing money-market fund assets.

The Treasury’s action gave money-market mutual funds the same guarantee that is carried by insured bank deposits: a promise that the government would not allow any losses. It kept money from streaming out of money-market funds and into banks. Now the panic is over — and the guarantee has ended. In fact, the President’s Working Group on Financial Markets is likely to suggest that the $1-per-share value long held sacred by money-market funds be abandoned. In other words, credit quality would matter again. If a fund bought risky paper in search of higher yields, the fund shareholders would bear any losses.

Does that make a difference to you in your search for a safe place to stash your “chicken money?” Maybe, and maybe not. The Treasury set a precedent with the original guarantee. Markets know the government would likely step in again to avoid a major breakdown in the short-term financing of America’s business.

So maybe there will be no distinction between insured bank deposits and the newly again-uninsured money-market funds. Is that a risk you are willing to take? Some money-market fund holders will now be looking for the highest levels of safety. If you have cash in a money-market mutual fund, you should go to the fund company Web site to see what kind of securities are held by your fund.

If you’re worried about another credit crisis, here are the safest places to put your money. But you’ll pay the price for the extra degree of safety by receiving a lower yield:
Treasury-only, money-market funds. Not all money-market mutual funds are alike. Some buy a combination of short-term assets, including commercial paper. Others announce that they will buy only short-term Treasury bills and overnight “repos.” You’ll find that these funds carry lower yields because they invest in only the safest instruments. For example, the American Century Capital Preservation Fund buys only the shortest-term Treasuries and has a year-to-date yield of only 0.04 percent.

Bank money-market deposit accounts. The difference between a money-market mutual fund and a money-market deposit account was nil when there was a federal guarantee. But now these liquid bank accounts are different because they carry FDIC deposit insurance. According to Bankrate.com, the average money-market deposit account yielded 1.1 percent last week.

Insured bank CDs. If you’re willing to tie up your money for slightly longer periods of time, you can get a slightly higher yield. For example, the Bankrate national average for one-year certificates of deposit last week was 1.76 percent, with higher rates available from some institutions. But you forgo the liquidity that money-market accounts offer, since there is a penalty for withdrawing money before the term of the CD.

Treasury bills. It is very easy for the individual investor to purchase Treasury bills directly from the government at the weekly Monday auctions. And you can do that with a minimum of only $100, but you’ll need a bank checking account (or money-market deposit account) to pay for your purchase and receive the interest payment. Just go to www.treasurydirect.gov, click on “Individual” and follow the easy instructions.

In these days of low yields, everyone — especially seniors who need the interest income to cover living expenses — is searching for a higher return. But if someone offers you a promise of higher yields — whether in a short-term bond fund, or an annuity, or other product — then you are taking on more risk!