Tags: money | market | t | bill

Investors Flood Out of Money Markets and Banks to T-Bills

Wednesday, 17 Sep 2008 12:23 PM

By Greg Brown

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As new evidence emerges that major money market funds have significant exposure to the collateralized debt obligation (CDO) crisis, worried investors are withdrawing billions from their banks and money market funds and pouring them into government-backed Treasury Bills, or T-Bills.

As news spread today that the Reserve Primary Fund fell below $1 a share in net asset value because of its losses on debt issued by Lehman Brothers Holdings, cash depositors across the banking and investment sector have been flocking to safer havens.

Early Wednesday, the rate on U.S. Treasurys had fallen to as low as 0.23 percent on three-month T-bills, the lowest since 1954, reports Bloomberg News.

And 30 day T-bills on Wednesday dipped briefly to a zero percent return.

Editor's Note: Monster Financial Disaster. We Warned You First! Read More

Just over a week ago the 90-day T-bill rate stood at 1.71 percent. But huge demand is driving investors into the vehicle, even if the interest rate paid is close to nil.

"The panic going round the money market world is what they've been investing in is not as safe as they thought it would be,'' Dominic Konstam, the head of interest-rate strategy in New York at Credit Suisse Securities, told Reuters.

"If the banks don't want to lend to each other they don't want to lend to the banks. That means where else are they going to put their money — they're going to put it in T-bills for safety.''

As Moneynews.com reported more than a year ago, many major market funds are vulnerable to the CDO crisis and it would be doubtful they could hold their value at $1 per share.

Though many money markets hold their $2.5 trillion under management in super-safe T-bills, a number of major funds had veered off into exotic, credit-backed securities.

Bloomberg magazine first detailed an alarming number of big-name funds that had been investing in collateralized debt obligations backed by subprime mortgage loans.

At the time, subprime had grown to represent $11 billion worth of supposedly safe money market funds.

Bloomberg cited Bank of America, Credit Suisse, Fidelity, and Morgan Stanley among such funds, noting they had more than $6 billion worth of subprime debt as of June 2007.

Now comes the news that Reserve Primary Fund, a money-market mutual fund in New York, has "broken the buck," falling to 97 cents a share Tuesday afternoon. The fund is reportedly making investors wait a week to take out money.

Primary Fund assets have fallen to $23 billion, down from $65 billion just a few weeks ago, reports Reuters.

Although the fund was not necessarily directly invested in CDOs, it held debts from Lehman Brothers Holdings, which went into bankruptcy due to subprime lending problems.

Bruce Bent, the chairman and founder of Reserve Primary Fund and the "father" of the money market mutual fund industry, warned the wire service a year ago that too many funds were being managed like stock and bond funds, not as safe cash havens.

"The people who have been managing many of these funds are not money fund managers, not cash managers," Bent said then.

"They are asset managers of different classes of assets, and they have imposed the psychology of managing stocks and bonds on money funds, and they are wrong," Bent said.

But Bent also claimed that his funds had not gone down that track and were immune to the credit crisis.

Bent in 1970 created the first money market fund, The Reserve Fund. No money market fund should invest in subprime debt, he said a year ago.

"It's inappropriate," he said. "It doesn't have a place in money market funds.”

Now, Bent’s Reserve Primary Fund is the first domino to fall.

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