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Posts Tagged ‘will money markets break the buck’

Municipal Money Market Funds: Caveat Emptor

Posted by Larry Doyle on June 29th, 2009 6:17 PM |

If and when your money market fund “breaks the buck,” will you be there to collect the change?

I believe it is increasingly likely that money market funds will “break the buck.” The recent SEC statement put forth by SEC Chair Mary Schapiro, which I highlighted in writing “The Buck Is Beginning to Break”, addresses this topic.

In that post, I specifically referenced my concern for municipal money market funds given the recent launch of a municipal version of an Auction-Rate Security, designated as an x-Tender by Wall Street. I walked you through the processing and packaging of this mystery meat in writing, “The Wall Street ‘Sausage Making’ Process.”

Today the Wall Street Journal offers another whiff of the factory and gives us further reason to stay away from municipal money funds specifically. The WSJ writes, Mutual-Fund Giants Give Mixed Reviews to SEC Proposals:

The SEC proposed requiring retail money-market funds to have at least 5% of their assets in cash, U.S. Treasury Securities or securities that are accessible within one day and at least 15% in assets that can be converted to cash within a week. Institutional money-market funds would be required to have at least 10% of assets in instruments that could be converted into cash within one day and at least 30% in securities that could be converted within one week. The rules wouldn’t apply to tax-exempt, municipal money-market funds. (LD’s emphasis)

Why and how is it that newly designed rules for a $3.8 trillion sector of the market can exclude a sector encompassing municipal funds? My antennae went up immediately upon reading that. What is different about municipal money market funds that would exclude them from a set of rules designed to protect investors?

Why doesn’t the WSJ itself pursue this line of questioning in writing the article. How can the industry segregate municipal money market funds?

Municipal finance has been largely dependent on newly defined Build America Bonds which entail an obligation by Uncle Sam. Call me suspicious, but I wonder if the exclusion of  municipal money market funds is due to the hoped for salvation of municipal finance via the municipal auction-rate security, x-Tender, otherwise known as Porky Pig here at Sense on Cents.

I will keep my nose to the ground in an attempt to sniff this out.  Anybody who can help us determine the nature of this stench, please share. In the meantime, stay away from municipal money market funds.

LD

The Buck Is Beginning to Break

Posted by Larry Doyle on June 25th, 2009 12:31 PM |

Investors in money market funds are generally under the assumption that those funds would always maintain a $1.00 NAV (net asset value). Well, investors should lose that assumption and prepare themselves for funds beginning to ‘break the buck.’ Do not panic, but let’s review developments in this $3.8 trillion sector of the market.

When markets were seizing up last September upon the failure of Lehman Bros., the U.S. Treasury provided a temporary backstop of money market funds so they would not break the buck and cause a “run on the fund.” Here is the Treasury statement from last September: Treasury’s Temporary Guarantee for Money Market Funds.

From that site, you will see links to other Treasury announcements on this topic. One of those links is Frequently Asked Questions About Treasury’s Temporary Guarantee Program for Money Market Funds. I strongly recommend investors review these FAQs. I specifically highlight the question regarding funds’ ‘breaking the buck.’

What if another fund in an investor’s fund family breaks the buck before this program starts? Is the investor covered?

The program provides a guarantee on a fund-by-fund basis up to the amount of shares held as of the close of business on September 19, 2008. The performance of a different fund, even one in the same fund family of the investor’s fund, doesn’t affect the investor’s fund’s eligibility. Investors should contact their fund to determine if their fund participates in the program.

The temporary guarantee was extended on March 31, 2009 as highlighted by this Treasury announcement: Treasury Announces Extension of Guarantee for Money Market Funds.

Well, investors should prepare themselves for this guarantee of money market funds to end and that certain funds will begin to ‘break the buck.’ One does not need to be a savant to see this development in a recent release from SEC chair, Mary Schapiro. Here is the full SEC Statement on this topic.

Let’s address a few critically important points . . .  (more…)






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