Money market fund falls below $1/share

[gonegolfin]

As an example of how the bankruptcy of financial institutions can cascade through the financial markets, the oldest money market fund in the country (The $23 billion Reserve Primary Fund) dipped below $1/share to $0.97/share today and temporarily suspended redemptions. The final tally on the share price could be worse than the $0.03 hit. The Reserve Primary Fund is only the second money market to drop below the expected $1/share level. Reserve Primary held $785 million in Lehman Brothers commercial paper and other medium term notes that it was forced to write off when Lehman declared bankruptcy.

I have written in the past that you really need to examine the portfolio holdings of non-treasury money market funds before committing an investment. Money market funds have been in stiff competition with one another in recent years to attract deposits and have been sacrificing safety for yield (as have other sectors of the financial industry). In addition to an abundance of commercial paper in these funds, some funds hold interest rate derivatives and mortgage backed securities to juice yields (hardly what I would call money market securities). While Treasury Money Market funds are not sexy, they do offer significantly more security for your US Dollar cash assets (second to holding US Treasury bills and notes themselves) in exchange for lower yields.

Bloomberg.com: Worldwide

Brian

 

[Toro]

Hence, the use of a Depression-era fund to insure MM funds, and RTC II.

 

[gonegolfin]

Hence, the use of a Depression-era fund to insure MM funds, and RTC II.

It will be interesting to see how this actually works. Only funds that want to participate need pay premiums. Yet, would you not think that the ones that wish to participate are the ones most likely to have problems? Meanwhile, the sounder funds pass on the insurance.

Brian