The most conservative money market mutual funds became wildly popular in the last week, and their shareholders are paying a price for that: They’re earning less interest.
The average annualized seven-day yield on retail money funds that primarily own U.S. government securities fell to 4.11% in the week ended Tuesday, down from 4.48% a week earlier, fund tracker IMoneyNet said.
The plunge in the funds’ returns occurred as investors rushed to buy Treasury bills and other short-term government IOUs, pulling yields on those securities down to two-year lows.
The sudden demand for government securities reflected the tumult in bond and stock markets. Because government IOUs offer an ironclad guarantee of repayment, they become the investment of choice when fear grips markets. That also draws money fund investors to government-focused funds.
Those funds took in $75 billion in fresh cash in the seven days ended Tuesday, boosting total assets to $573 billion, IMoneyNet said. As the funds put that cash to work in government IOUs, they helped to drag down yields.
By contrast, general money funds that invest primarily in corporate and other nongovernment IOUs had a small outflow of $8.5 billion, trimming total assets to $1.7 trillion.
The seven-day yield on general retail money funds was nearly flat for the week, at 4.55% versus 4.56% a week earlier.
Fund industry analysts were heartened that small investors for the most part stayed put in general money funds despite concerns last week about the quality of some of the IOUs they held. Most analysts say that restrictions on the funds’ investments make it unlikely that investors would lose money.
“The funds’ structure withstood another shock,” said Pete Crane, head of Crane Data, a fund research firm.
Although credit-market worries have eased this week, some experts said money funds overall probably would seek to be as conservative as they could with their investments, which could mean a further drop in yields.
“There’s just extreme caution out there,” said Deborah Cunningham, investment chief at Federated Investors, a large money fund manager.