Good sign for credit markets: Money funds get more cash
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One less thing to worry about: Cash keeps flowing back into so-called prime money market mutual funds, indicating that the temporary federal insurance guarantee of the funds’ assets has bolstered investors’ confidence.
Prime funds, which invest mainly in short-term corporate IOUs, were rocked in mid-September after the Reserve Primary fund lost money on Lehman Bros. IOUs and the fund’s share price ‘broke the buck.’ That was only the second time in 38 years that investors lost some principal in a money fund.
The news caused some investors to pull cash from other prime money funds, a slow drain that continued for three weeks -- even after the government on Sept. 19 hurriedly pulled together a voluntary insurance plan for the industry, to protect investors’ savings.
But prime retail funds (those used by individual investors) saw a net cash inflow last week, and the trend has continued this week, according to fund tracker iMoneyNet Inc. Total assets of prime retail funds were $718.6 billion as of Wednesday, up from $703.7 billion on Oct. 6.
The last thing the battered credit markets needed was a sustained run on the money fund business. For one thing, a heavy run would have forced liquidations of securities by the funds, raising the risk that other funds would have broken the buck.
As it was, the outflows that occurred in recent weeks, and fear of more, spurred many prime funds to shift some assets to highly liquid Treasury securities. That left many businesses unable to sell short-term debt such as commercial paper (normally a staple of money fund portfolios), worsening the credit crunch.
Retail investors are showing more confidence in prime funds than are institutional investors: Assets of prime institutional funds were up just fractionally between Oct. 6 and Wednesday, from $863.9 billion to $864.1 billion.
Institutional investors still are preferring to shift cash to government-only money funds, which invest exclusively in Treasury and federal agency securities.
Although the cash inflows to prime money funds are a good sign for the credit markets, I could make a strong case that investors should be moving out of money funds in general, based solely on the interest-rate outlook. With the economy on the ropes, the Federal Reserve seems likely to cut short-term interest rates further. That should pull down money fund yields in the next few months.
Cash that you don’t need to tap anytime soon might find a better home in a six- or nine-month bank CD that pays something better than the current 1.76% average annualized yield on prime retail money funds.