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Online Savings & Money Market Account Rates 2021

Online Savings & Money Market Account Rates

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Fannie and Freddie Problems Could Impact Money Market Funds

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The recent problems with Fannie Mae and Freddie Mac roiled the mortgage markets but they also had the potential to impact many money market funds. The government acted to prevent a bigger problem in both.

Everyone at this point knows that Fannie Mae and Freddie Mac excercise a tremendous influence on the morgage market.  But they also play a large role in generating returns for money market funds.  One of the dangers of a collapse in either institution is that money market funds that invest in short term bonds from Fannie and Freddie could suffer losses.  Such losses would significantly undermine the financial system.

Money market funds, unlike money market accounts, are not FDIC insured.  They are short term investment vehicles and their money is invested in short term (typically less than 1 year) assets that are continued extremely safe - T-Bills, CDs, and Mortgage backed securities (generally bonds issues by Fannie and Freddie).  Because the government has implicitly backed both insititutions, the bonds from Fannie and Freddie are considered almost as safe as T-Bills, which are backed by the US government.

Marketwatch reports that:

"Peter Crane of Crane Data, publisher of the Money Fund Intelligence newsletter, noted that paper issued by government agencies represents about 11% of the roughly $3.5 trillion held in money funds. Paper from Fannie and Freddie is roughly one-fifth of that government-related paper. In absolute terms, it's a huge amount of dollars, but it means that just 2% of the average money fund portfolio is tied up in Fannie and Freddie."

Of course, that's just an average.  Some money market funds hold substantially more and some hold less.  And even a 2% loss in a money market fund is unacceptable to an investor who expects that there money is completely safe.

For now, Money Market funds appear to be safe.  As Peter Crane wrote on my previous post on money market funds: "But no retail investors has ever lost money in one [money  market funds].

But, as we learned with Auction Rate Securities, it's always wise to understand what's in your portfolio.  I personaly plan to take a look at my money market funds to see much exposure they have to Fannie, Freddie and other real estate related investments.  Since I believe housing will come down further, I want to make sure I understand my risks.

No Safety in Current Savings Rates

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In the current dreadful economic environment, online savings accounts may provide security of your principal (as long as you stay within FDIC limits), but the rates can fall out from under you in a second.

The current economic environment is pretty miserable and the only place to hide is in cash.

But, when you hide, don't rely on the interest rate that is advertised.  The reality is that there is no guarantee that you will be getting that rate from one day to the next. 

In this environment, banks will compete for deposits with one another on any given day.  The next day, the economy will deteriorate, short term treasuries will fall (as will expectations about a Fed rate hike), a bank or two may go under, and the rate that is being offered may fall.

Plenty of banks, including Countrywide and One United, have lowered their savings rates over the last couple of days.  As a result, short-term CDs are beginning to look like a much more attractive way to get through this period without seeing the interest rate that you are earning decline immediately.    The exception, of course, is the Everbank program, which is guaranteed for new depositors for 3 months (so is effectively a CD).

Auction Rate Securities Problem Ends As It Began - quietly

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Without great fanfare, this problem has begun to wind down.

For me, the auction rate security problem was the cause of many sleepless nights.  In the middle of February, my broker suddenly let me know that all of my cash which he had advised me to move into auction rate securities over the last several years, was illiquid until further notice.  He told me that the auctions had failed and that I would be getting higher rates to compensate me for my loss of liquidity.  He could not assure me when I would get out of these bonds which led to many sleepless nights as I needed the liquidity.

As the months rolled by, the excuses mounted, as did the obvious and clear indicators of impropriety on the parts of all of invvestment banks (see some of the earlier acticles posted by me and others on   Little by little, one by one, many of these things got called away.  It started with the municipal and state issues that did not want to, or could not, pay the heavy default rates, and earlier this month, some of the major financial institutions that use auction rate preferreds to leverage their portfolios, including Nuveen, finally gave into the court of public opinion and got rid of theirs.

I understand that Pimco and Blackrock still have not agreed to refinance or refund the holders of their crooked issues.  Folks at these organizations should be ashamed that they are continuing to force investors to be illiquid so that they can get higher returns.  I believe that they soon will come under pressure to get rid of their auction rate preferreds, leaving these instruments to be a remnant from 2008.