Money Market Fund Yields May Fall to Less Than 0%

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Money market funds invested in Treasuries will provide a negative return to investors if the Fed cuts rates next week, as its widely expected to do. This will be the first time this has ever happened. It's another

Money market funds that invest the bulk of their cash in treasury bills may provide a negative return to investors if the Fed cuts rates any further.  Low Fed Funds Rates combined with a rush to own the safety and security of treasury bills have pushed the yield on T-bills down to 0%.  Money market funds that invest in Treasury Bills therefore receive a 0% return, or a very low return from their investment.  Once the expenses of running the money market are factored in, the actual return of the fund will be less than 0%.

A Bloomberg article on this says:

'Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.

“No one has ever paid above and beyond their interest income to be in a fund,” Crane said. “But if we see another cut, we’ll likely see negative yields."'

If returns turn negative, Crane believes that the funds will cover the shortfall by charging customers in the form of monthly fees.  The end results would be a negative return for investors.  This is different from a money market fund breaking the buck.  When a fund breaks the buck, the value of its assets fall, wiping out some of the principal of the money  market.  That is what happened to the Reserve Primary Fund  (RFIXX) when it lost considerable money due the bankruptcy of Lehman Bros.

Remember, this would only happen to money market fund that invest primarily in US Treasuries.  The BestCashCow Money Market Fund Rate Table lists several funds that are far above 0%, the highest paying 2.57%.  This is a far cry from September when the collapse of Lehman froze the money markets and drove yields up to the 4-5% range. 

The question is how long will Treasuries stay below 0%.  Even if the Fed drops the Fed Funds rate to 0%, some believe that Treasury yields will still rise.  Bill Gross, manager of the world's biggest bond fund had this to say on Bloomberg TV:

"“Treasuries have some bubble characteristics, certainly the Treasury bill does.  A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return.”

After bank deposit accounts and treasuries, money market funds are considered the safest and most liquid places to store money.  Despite being safer than money market funds, bank savings and money market accounts pay far more interest.  For example the top savings account on the BestCashCow rate table pays 4.00% APY why the top money market fund pays 2.57%.  

Money market funds, which are not FDIC insured should be not confused with money market accounts, which are.  

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

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