Are money market funds in trouble?
Money market funds, cash invested in short-term debt, used to be pretty reliable places for investors who wanted to get moderate returns. But with interest rates near zero, yields on funds are tumbling. Jeremy Hobson reports.
A fistful of money (REKINC1980/iStockPhoto)
More on America's Financial Crisis
TEXT OF STORY
Tess Vigeland: It seems the entire investing community right now is looking for a safe place to park cash; people don't even care if they make any interest, they just want a guarantee that at least they're not going to lose their shirts. One popular parking spot: money market funds. Even though one of the darlings of the field, the primary fund, broke the buck a couple months ago, investors have been flooding into those funds -- so many in fact, that some fund companies are closing them to new depositors. Marketplace's Jeremy Hobson reports on why that safety valve is being shut off.
Jeremy Hobson: When you make your money on debt, the higher the interest rate, the better. In the world of money market funds, the problem lies in the 20 percent or so that are invested entirely or almost entirely in U.S. treasuries. Short-term government bonds are yielding almost nothing right now, so the cost of running a fund is more than the fees charged to investors. Milton Ezrati is a senior economist at Lord Abbett and Company.
Milton Ezrati: And so you're asking your depositors effectively -- the people who have their money in money funds -- to get virtually no return. Or you subsidize it and you make no money on the money fund.
The pressure on funds may force some to shut down entirely, says Connie Bugbee of iMoneyNet.
Connie Bugbee: I think we'll see that a small portion. But what we've seen over the years and we'll continue to see is some consolidation.
Milton Ezrati say it's unlikely that any investor will actually lose money in a money market fund.
Ezrati: At the very least they'd be breaking even or having a modest return.
He says it's more likely that investors will move their money elsewhere. Perhaps to sometimes riskier funds that buy commercial paper, or maybe even back into the stock market.
Ezrati: The Federal Reserve is trying to induce people to invest in longer term instruments and in equities and so this is the first positive sign for what the federal reserve wants to accomplish.
In other words, bad news for short term debt investors may be a nice Hannukah gift for Ben Bernanke.
In New York, I'm Jeremy Hobson for Marketplace.
Comments
Comment | Refresh
12/23/2008
As the above (or below) poster pointed out, spending rather than saving is the eventual problem in any economy. I say "any", because we have exported this idea to other economies that used to save.
Why did they save? For some, it was the simple reason, there wasn't much out there for them to buy.
The question then becomes...what is it that we ARE buying with the money that we should be saving? Has the cost of the basics needed for life really gone up that much? Or did we start buying things we don't really need, with money that we should have been saving?
From Natick, MA, 12/22/2008
For quite a while there has been many carrots in our tax code to encourage spending now for goods or for buying financial stocks, and to discourage simply saving money. This seems to be yet another attempt for people not to save. However, I would argue that one of the main long term problems with the US economy has been this philosophy. Obviously people spending now has immediate positive impacts, but is inherently unsustainable.
My opinion is that we need to shift so that we achieve a better balance (i.e. my saving). Remember saving now doesn’t mean the money will NEVER be spent, it just will happen either later or will be used for larger purchases.
Post a Comment: Please be civil, brief and relevant.
Email addresses are never displayed, but they are required to confirm your comments. All comments are moderated. Marketplace reserves the right to edit any comments on this site and to read them on the air if they are extra-interesting. Please read the Comment Guidelines before posting.
You must be 13 or over to submit information to American Public Media. The information entered into this form will not be used to send unsolicited email and will not be sold to a third party. For more information see Terms and Conditions and Privacy Policy.