How safe is your money market fund? Money-market funds have long been regarded as a safe place to park cash. They paid higher interest than banks and savings and loans, and your deposits were easily accessed.
But that all changed in 2008. The collapse of investment bank Lehman Bros. caused something of a panic as depositors wondered if they’d get their money back. To stem the outflow and prop up the funds, the government temporarily guaranteed money market accounts.
Money funds are still seen as a relatively safe harbor, but on this week's Money Matters, financial commentator Greg Heberlein explains to KPLU's Dave Meyer that you need to know where your fund is investing your cash. More importantly, you need to know if your fund is holding European debt.
European debt concerns
Today, $2.7 trillion rests in money funds. That’s a lot of money, especially when you consider the current interest rate is less than a tenth of a percent.
A few weeks ago, Federal Reserve Chairman Ben Bernanke said something that compelled many money-market holders to take their cash and run. The nation’s top banker said the nation’s banks face little threat by the financial troubles affecting Greece and other European countries. But, he added, money market funds holding European debt are of concern.
No wonder investors got nervous. In two weeks, depositors removed more than $60 billion from their funds. That’s a relative drop in the bucket to total assets, barely 2 percent. But it demonstrates a growing worry.
Because returns on conventional debt are so low, some managers may be buying European debt because that’s where the potentially huge returns may be.
What should you do?
To begin with, a severe threat to money markets could be erased by a 2008-like government guarantee. With the current frustration over the government’s mounting debt, that may be easier said than done.
Second, investors could check their money-market’s portfolios. But those portfolios turn over so quickly, and portfolio listings are so infrequent, such a look might not provide an accurate picture. Absent concrete information, it is understandable that some depositors headed for the door.
Here’s what Greg did:
"I called the money-market fund and asked what exposure it had to European debt. Before I even got an answer, the fund recommended I switch to a money fund invested only in government securities. Almost every money-market complex offers such funds. In normal times, a government fund offers a stingier return because it is safer. But because rates are so incredibly low, my cash earns the same rate in governments – a paltry 2 hundredths of one percent – than the normal fund offered.
Without any fuss, without the inconvenience of even visiting the bank or brokerage, the money was transferred and my concern was allayed.