Some money market funds could close as rates plunge.

Discussion in 'Wall St. News' started by S2007S, Dec 11, 2008.

  1. S2007S


    Some money market funds could close as rates plunge.

    By John Waggoner, USA TODAY
    Interest rates have fallen so far that some money market mutual funds — long considered the investor's safest haven — could be forced to shut down or dole out losses.

    Plunging rates mean that some funds are getting less in interest from their investments than it costs to run the fund. And investors who sought safety in money funds could face losses because of the funds' management costs.

    The average money market mutual fund now yields just 0.94%, down from 4.16% a year ago, says iMoneyNet, which tracks the funds. Funds that buy only Treasury securities have seen their yields fall to an average 0.25%. Some 206 funds have yields of 0.09% or less, according to iMoneyNet.

    Funds have few options. Many are already waiving expenses — essentially, running at a loss. Funds that say in their prospectuses that they will invest only in Treasuries can't suddenly move money into other investments as a way to boost their returns.

    By law, funds can't charge account fees, as banks do, for fund management. Instead, they must charge a percentage of the fund's assets.
    FIND MORE STORIES IN: Federal Reserve | CDs | Morningstar | Treasuries | Evergreen | T-bills | iMoneyNet | Peter Crane | Crane Data | Treasury-only

    A few funds have stopped taking new money. For example, Evergreen 100% Treasury Money Market fund closed to new investors on Dec. 1, citing "current conditions in the Treasury markets."

    Other funds may shut down entirely, returning money to investors and leaving the money fund business to large companies that can afford to use the funds as loss leaders.

    Funds would likely slide to negative territory slowly in a period of weeks or months, says Peter Crane, editor of Crane Data. "It would not be with a bang, but a whimper," he says.

    Funds that invest in other money market investments, such as commercial paper or jumbo bank CDs, have a bit more room before hitting zero. Vanguard Prime Money Market fund, one of the largest money funds, currently yields 2.51%.

    If the Federal Reserve nudges the key fed funds rate to half a point next week, as is expected, more funds could struggle to keep from posting losses.

    The average money fund tracked by Morningstar charges 0.70% a year to run the fund. Normally, that's not a problem. But rates have fallen far on Treasury securities, a staple of the funds.

    Tuesday, the Treasury auctioned off $32 billion in one-month T-bills with a zero yield, the first time that has happened. Three-month T-bills yielded 0.01% Wednesday; six-month T-bills, 0.2%.

    Those low yields haven't stopped worried investors from running to Treasury-only money funds. Assets in Treasury-only funds have doubled, to $412 billion, since Sept. 2.
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  3. tradersboredom

    tradersboredom Guest

    these fund managers are lucky to get paid anything to hold on to people's T-bils or savings accounts.

    even savings accounts pay more than market funds.

    dividends pay more.

  4. tradersboredom

    tradersboredom Guest

    investors get a better return on real estate if they are investing for the long term it's at least 5% which is still nothing.

  5. tradersboredom

    tradersboredom Guest

    when the gov't lowers interest they want you to invest the money rather than holding it in idle cash.

  6. Daal


    I dont get whats the big deal. if people are willing to buy treasuries at 0% why should MM funds who focus on treasuries, yield anything at all