Tags: Coronavirus | Financial Markets | money markets

Money Market Funds Not Risk-Free

graphic shows words money market in red with coins on the left and a pencil on the right

By    |   Thursday, 09 July 2020 09:59 AM

Money market funds are not as safe as people think.

Barrons said the money funds have been made more interesting during the pandemic.

It reported that from March 2-23, the assets under management of prime money market funds dropped by $120 billion. As a result, the Federal Reserve set up the Money Market Mutual Fund Liquidity Facility to provide banks with loans to purchase money funds’ underlying securities.

“As a prudent financial adviser, in March, we were part of that selling pressure because we looked at corporate money markets, and we said, while the risk is lower than it used to be in 2008, there’s still a risk and the yield is just not that much higher (than Treasury bills),” says Andy Kapyrin, co-head of investments at RegentAtlantic. “So we swapped our holdings of corporate money-market funds into holdings of treasury and government money-market funds.”

Kapyrin said there’s another price behind the $1 per share that retail investors see — the shadow net asset value, or NAV. And if that falls under 99.5 cents a share, it ceases to be a shadow and the fund has officially “broken the buck,” in Wall Street terms, Barrons noted.

As a result, the fund must redeem shares at less than $1.

The last fund to break the buck was 2008’s Reserve Primary. But Barrons pointed out liquidity in 2020 proved a problem because of regulations established in 2014 brought on by the Reserve fund problem.

The regulations permit the imposition of as much as a 2% exit fee on shareholders and/or gate the fund completely so investors can’t sell their shares for 10 days, according to Barrons.

Meanwhile, the pandemic could cause the stock market to plunge 40% over the next year, according to financial analyst Gary Shilling. He said Monday the drop would be a result of the economic recovery taking longer than expected.

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Money market funds are not as safe as people think.
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Thursday, 09 July 2020 09:59 AM
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