Top Treasury money market funds have yields at about 4.58%, but top performing prime money market funds have yields of 5.18%. What gives? Aren’t all money market funds created equal.
Alas, the answer is no.
To achieve the performance over treasuries, these prime money market funds, also called enhanced or plus cash funds, invest in asset backed commercial paper and SIVs.
What is a SIV? It is a fund that borrows short and buy long term securities at a higher rate. Well, there are 2 risks with SIVs: solvency and liquidity. Solvency has to deal with risk of the long term debt failing below the value of the short term debt (read subprime mess). Liquidity deals with outflows to the short term borrowers coming due before the long term assets pay (read credit crunch).
Everyone knows that a money market account won’t go below a dollar, right? GE Asset Management fund (an enhanced cash fund) hit $0.96.
Other headlines include SunTrust buying SIVs for a money market account from Cheyne Finance that defaulted last month. Bank of America is planning on providing as much as $600 million to fund debt from SIVs. Blackrock sent a letter to shareholders specifically stressing that “enhanced” and “plus” cash funds were not money market accounts. (http://literature.blackrock.com/eStudioContent/public/BRLF_Cash_Mgmt_082007_Client_Lttr.pdf?PubDate=/1_8_2008_BRLF_Cash_Mgmt_082007_Client_Lttr.pdf)
So what does this mean? The higher the yield, the higher the risk. But, I am not suggesting that money market accounts are going to be imploding all over the place. I do expect that most financial institution will put capital into the funds to maintain the $1 price.
So what should you do? If you are in an enhanced or plus cash fund, you should see what type of investments the funds are. For the AAA money market funds invested in treasuries, you should have no worries.
You could also park your money in 3 month CDs. They are FIDC insured up to $100,000 (I believe) and earn around 5%. If you need the liquidity, you might want to review the holdings of your money market account.
What's in your money market fund?
January 8th, 2008 at 02:16 pm
January 8th, 2008 at 02:38 pm 1199803106
Thanks for this posting.
January 8th, 2008 at 02:55 pm 1199804133
The reason I say this is twofold:
1) an emergency fund is just that, for emergencies and not extension of your checking account
2) if you use it as a checking account, the interest you would earn would be negligible. If you get paid $1,000 a week and put it in the reasury account and use it to pay biils, how long is that money going to be in the account for what period of time? Five days?
January 8th, 2008 at 03:09 pm 1199804998
Thanks for the response...I'm very interested in this.
Is there a reason why I might keep my emergency savings in the treasury money market and not the savings...assuming the interest is about the same?
January 8th, 2008 at 03:34 pm 1199806455
As for the extra $1,000, I would probably just put that into the savings account. One thing to look at is the fees in your checking account. Do you have to keep a minimium?
January 8th, 2008 at 04:02 pm 1199808179
The $1000 is not really extra. That's just what happens to be left at the end of my month after I finish paying bills and everyday purchases. After I start my new month and get my next paycheck deposited, I take whatever is left from the previous month (usually $1000) and pay toward my credit card. Then I'm starting the new month with new money only.
So I couldn't just take the $1000 and move it to savings at any time. I use it as a cushion of sorts until I get my next check and the new month begins. I would like for the total amount of money I get paid each month to work for me somehow.