Enhanced Money Markets Causing Problems in Europe

Enhanced Money Markets can get you rates above a traditional money market fund but they can also get you into trouble, as Europe is finding out.

I was just reading an article on Marketwatch about the credit crunch in Europe and how  part of the problem is emanating from enhanced money markets.  These are "low risk" funds that are money markets in name only.  In fact, they are very short bond funds that invest in investments traditionally outside the risk spectrum of a money market - longer-term fixed and floating rate agencies, corporates, and asset backed securities. 

It appears that quite a few of these enhanced money market funds had purchased sub-prime asset backed securities and they have taken a hit along with hedge funds and other investment funds.  To help maintain liquidity in these supposedly "safe investments" is one reason the ECB has been injecting money into the European banking system.

It's one thing for the public to lose money on speculative investments but quite another for them to lose money on something they thought was rock-solid.

Traditional money market funds are supposed to be safer and traditionally do not face the same set of risks.

Northern Trust has a good article on enhanced cash investing.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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