Trillions of dollars of money market funds are the subject of growing concerns about European debt contagion, especially as Greece's economy wobbles under the weight of its problems, but experts caution the situation may fall well short of a systemic risk problem.
At issue is whether the as much as 50% exposure of money market funds to European debt securities make those funds vulnerable to “breaking the buck,” which in turn could lead to a run on the funds. On Friday, the House Financial Services Committee held a hearing on the issue and The Wall Street Journal devoted its lead editorial to the topic on Monday.
Michael Krasner, managing editor of research firm iMoneyNet, which tracks money market funds, notes that only one fund — the Reserve Fund — broke the buck (it’s value fell to 97 cents per share rather than the $1.00 a share expectation of money market investors) as a result of the Lehman Brothers securities it held. The bigger concern, he stated in an interview with AdvisorOne, was the fear this caused among investors.
“Other funds that may have held Lehman securities had more resources to deal with the situation and did not break the buck, though many suffered redemptions in what became a run on the funds in general — whether they had exposure to Lehman or not,” Krasner said.
“That‘s when the Treasury stepped in with the guarantee program, which was never tapped, by the way,” Krasner added. The failure of just one money market fund in the Lehman crisis — and one other in the early ’90s unrelated to Lehman — compares favorably to the number of bank failures in the past 40 years, he said.
Christopher Thornberg, an economist and forecaster with Beacon Economics, was dismissive of the panic over money market funds. “I don’t see a systemic threat to the money markets,” he said in a phone interview. Thornberg, the founding partner of the Los Angeles-based firm, added that “the issue with Lehman failing was more because no one expected Lehman to fail. Nobody is any way, shape or form confused about the Greek situation. Various financial institutions are working to inoculate themselves against that situation.”
Taxable institutional money market accounts total close to $1.7 trillion in net assets, with taxable retail accounts adding an additional $700 billion. These funds are some 50% invested in European debt instruments — CDs and commercial paper — according to Fitch Ratings, though iMoneyNet’s Krasner says the funds “seem to be rolling off such holdings as they mature and not buying new ones.”
Worries over a possible Greek default and the uncertainty over details of a European bailout last week triggered a flight to safety in U.S. bonds, and a parallel flight to government taxable funds took place in the immediate aftermath of the Reserve Fund failure in 2008. At that time, investors gave up yield for safety, but today there is scant difference in the return on government and prime funds, so safety-conscious investors are making no sacrifice if they flee to government securities-based money markets.
At the retail level, both types of funds have a 7-day yield of 0.01% and 12-month yield of 0.02, though at the institutional level prime money markets command 0.04% and 0.08% yields, respectively, according to recent data provided by iMoneyNet.
The low-rate environment, made policy by the Federal Reserve in 2008, was meant to induce investors to channel their funds into riskier assets such as the stock market as a means of reviving the economy. But new SEC rules imposed last year on money market funds require that the funds be run more conservatively and with greater portfolio holdings transparency and turnover; 10% of holdings must mature overnight and 30% weekly, making the funds more liquid. “So securities in general are being held for even shorter time periods than before to reduce risk,” Krasner says.
And even if there were to be a restructuring of Greek debt, Thornburg adds that most of its impact will be felt abroad in the form of an extension of loan due dates and a partial “haircut to investors of 20% to 30%. I don’t see this [U.S. money market funds owning European bank securities] being a contagion-type situation.”
Krasner advises, in general terms, that investors worried about the safety of their money market funds should think about why they have the money in the funds, when they want or need to take it out and redeploy it, and the risk and rewards associated with placing it in other cash options.