2:07 – I’ve been getting a lot of mail about money market funds recently, is any of this important?
money market funds
0:30 – Fees
3:35 – Money market rates
6:35 – Tough times for retirees
Today we read an interesting article from Marketwatch titled, “The Fed is Deliberately Stealing from Savers”. Yes, that’s right. Janet Yellen and the rest of the Fed are thieves. You read it it first at Marketwatch. We’ll link to their post below. The author asserts that:
The academic name for the Fed’s current policy is financial repression. But a more apt name would be “Throw granny under the bus,” because the program boils down to taking from savers and fixed-income recipients and transferring that purchasing power to other entities.
It’s really easy to hop on this author’s bandwagon and say the Fed is deliberately hurting people who live on fixed income. Interest rates are absolutely too low to live off of. However, that’s nothing new!
In fact, we made a video about this not too long ago (https://mullooly.net/interest-rates-low/7635). Interest rates have been too low to live off since the late 1990’s. People haven’t been able to live off the interest of their investments in over a decade. We also made a video about the changes made to money market funds after 2008 (https://mullooly.net/money-market-fund-rates/7403). We discuss the unlikelihood of money market fund rates rising to pre-2008 levels again because of the new regulations enacted.
Since this has been an issue for about 14 years now, not something recent as Marketwatch will have you believe, what are income oriented investors supposed to do? Savers have been forced to find other things to do with their money. Some have chosen to tap principle because they just cannot handle market risk. Sometimes life’s biggest risk is not taking any risk at all. Others have turned to stocks, bonds and other investments.
One alternative that we highlight during the podcast is market linked CD’s. These investments are typically offered with a minimum rate (like 1%) and a maximum rate (say 6%). In the hypothetical situation we just described: if the market does great, the investor makes the 6% maximum rate; if the market does poorly, the investor makes the 1% minimum rate. For the right person these market linked CD’s might be an interesting option. The downside to market linked CD’s is that they are normally long term deals (often 7 years or so). They are not liquid investments, so selling one before the term is up would depend entirely on the secondary market. Investors should also consider opportunity cost as a downside to market linked CD’s. Sure you have that minimum rate guarantee, but could you invest on your own (or with an investment advisor) and do better? There are pros and cons to think about with these investments, as there are with any investment.
So is the Fed stealing from investors? If keeping interest rates low to help the economy hit their target growth numbers is theft…then yes. Another sensationalist headline from Marketwatch. Read at your own risk!
To follow up from last week’s podcast, Tom put together a quick video explaining why money market fund rates are so low. After 2008, the SEC changed some rules that dictate the type of securities allowed to be held in money market funds. Some of the key requirements set have to do with liquidity. 10% of any money market fund has to be in securities that can be liquidated in just one day. Another 30% has to be in securities that can be liquidated within a week. No holdings within a money market fund may have a maturity exceeding 397 days. These limitations have been put into place by the SEC to help ensure we don’t “break the buck” again, like in 2008. These restrictions will also keep money market fund rates low until the Fed decides to raise short term rates.
Make sure to watch the video to hear more from Tom on this topic!
If you would like additional information regarding money market funds and their rules and regulations head over here: https://www.blackrock.com/cash/literature/whitepaper/us-money-market-funds-and-rule2a7.pdf
Do you know what it means when a portion of your account is in the money market? A lot of investors don’t and feel silly asking. The funny part is that many people in the financial industry probably don’t completely understand either. Tom and Brendan explain the money market in this week’s Mullooly Asset Management podcast. You’ll learn what a money market fund is and what they’re made of.
When you have money in the money market you actually own shares of a mutual fund. This fact surprises a lot of people. If you have $2500 in the money market, you actually own 2500 shares of a money market mutual fund. Each fund creates literally millions of shares. This waters down the price per share so that each share is almost always worth $1. Many places also offer FDIC-backed money market mutual funds. There’s always the possibility that we could “break the buck” (like in 2008), but the odds of that are slim. However, we will discuss “breaking the buck” in an upcoming video that you should all check out!
Investors are often confused when they receive a prospectus upon putting money into a money market fund. Like we stated previously, these are technically mutual funds. Mutual funds are sold by prospectus only, so you should be receiving one when putting any amount of money into a money market fund.
Many advisors, brokers, and other members of the financial industry refer to the money market as “cash”. This definitely contributes to investor confusion. The terms are used interchangably although you aren’t actually in cash. This mainly has to do with the liquidity of money market mutual funds. Your assets can easily be converted to a check, invested, or otherwise moved in one day. Currently money market funds earn close to 0% for investors, the same as cash in your pocket. So be aware that when a portion of your account is in “cash”, more likely than not that really means it’s in a money market fund.
Money market mutual funds are made up of securities such as treasury bills, negotiable CDs, and commericial paper. The weighted average maturity of the money market fund’s holdings must be less than 60 days. They must also offer minimal credit risk and have at least 95% of the its total assets rated in the top two categories by a NRSRO (Nationally Rated Statistical Rating Organization). This helps to ensure the fund’s liquidity and safety.
You can learn more about money market funds by visiting this informational page provided by the SEC: (http://www.sec.gov/answers/mfmmkt.htm)
Make sure you listen to this week’s podcast to hear the entire conversation Tom and Brendan have regarding money market mutual funds.
I had several calls this week from clients regarding money market funds and government insurance. Essentially, the conversation would go something like this:
“Tom, I heard recently that the government will no longer be insuring money market funds. Should we do something about this? Should we be concerned?”
And I would reply “you DO know, that money market funds were never insured before last fall…right?”
It’s true. Most money market funds were not insured before the fourth quarter 2008. Oh sure, there were “insured” money market options/choices around before 2008. But their yields were so low, you needed a microscope to see them. And in case you did not know, the actual technical name for money market funds…ALL money market funds…is “money market MUTUAL funds.” Which is why you get a prospectus when you open a money market account.
The objective of a money market mutual fund is to maintain its’ $1.00 per share price, and return you a few bucks in interest/dividends. Make sure all those assets they were invested in added up to $1.00 every night. That’s it. Their marching orders: Keep that $1.00 price per share. Or die.
And last fall, a few money market mutual funds had some trouble maintaining their $1.00 per share price. Their assets get priced every business day. More on this part in a moment.
Anyway…when the “financial crisis” spilled over into 2009, the Government continued to extend their “insurance” on money market funds. That coverage will cease in October 2009 (very soon).
Part of the reason why interest rates on money market funds fell to zero was because:
- The Fed aggressively cut interest rates — and promises to keep them low, at least for the present time
- There is no incentive to pay a higher rate to attract deposits — all money market funds essentially became the same everywhere
- What’s the price (yield) for safety?
Knowing that the “government backstop” of money market funds may not be renewed in October, I instructed TD Ameritrade (during the month of August) to move all money market assets from their traditional money market fund (which carried the government backstop) to an FDIC insured money market fund. There is no cost or transaction charge involved in this move. It was done strictly for peace of mind.
Why did the government have to insure money market funds in the first place?
The answer: Lehman Brothers
Don’t misunderstand: Lehman Brothers themselves did not kill the safety of money market funds. It was “allowing Lehman Brothers to go under” that dragged money market funds with them. Like it or not, Bear Stearns and Lehman Brothers were two major players in the commercial paper market.
And commercial paper is what “drove the bus” called money market funds.
You didn’t really think money market funds were just T-bills, did you?
So…how was it that a money market fund at a bank or brokerage firm would be paying (for example) 1% and an outfit like ING could pay 3%?
Hmmm. Exactly what WAS in that money market over there? It certainly wasn’t all treasury bills.
But I digress. Lehman Brothers was not only a market maker/facilitator for the commercial paper market. They also borrowed heavily to fund their day-to-day operations with commercial paper.
OK, so remember a moment or so back when I wrote “a few money market mutual funds had some trouble maintaining their $1.00 per share price. Their assets get priced every business day”? Here is where things fell apart:
Lehman was a big player in the commercial paper market (as were all the big banks, along with GE Credit, Ford, GM and AIG, and others). When you manage a money market fund, and your balance sheet is choking on stuff like short term financing notes (commercial paper) from companies that may not open for business the following Monday…well…what do you think you can sell those investments for?
A lot less than you paid for them.
Which is why suddenly, money markets assets stopped “adding up” to $1.00 per share. It’s like walking home with a lousy report card in your hand.
Taking Bear Stearns and Lehman Brothers out of the commercial paper market is like taking the umpires off the field in a Little League game. All that’s left are little kids who don’t know the rules. Actually, it’s not fair to compare those two companies with umpires. But a Little League game without umpires looks like disorganized chaos. And that’s when Uncle Sammy pulled up to the field, and change the rules.