'Money Market Substitutes' Get Hit by Subprime Woes

[gindie]

Ultra-short bond funds, bank-loan funds, etc.

At Morningstar:

'Money Market Substitutes' Get Hit by Subprime Woes - Morningstar Fund Spy

[FIREdreamer]

Even money market funds are not immune. I've heard on CNBC last week that a money market fund managed by a bank in Luxembourg lost about 26% of its value overnight...

[chinaco]

Originally Posted by FIREdreamer

Even money market funds are not immune. I've heard on CNBC last week that a money market fund managed by a bank in Luxembourg lost about 26% of its value overnight...

Yup. It can happen. Thats why I use a MM fund holding Gubmint paper.

[al_bundy]

checked my 401k last night. Principal has separate MM and bond/mortgage funds. checked the holdings and if there is mortgage exposure, it's very little.

need to check my wife's now

[TexasGal]

I have a large amt of 401k money in Vanguard's Prime MM. I've asked several people if I need to worry and they said no. Vanguard has govt MM fund, but I can't move from one MM to another fund in the same low-risk category. I always thought that short of FDIC insured money in a bank the Vang Prime MM was as safe as it could get. Not so?

Issuer by %
Bankers Acceptances6.0%Certificates of Deposit49.9%Commercial Paper20.7%Other4.9%U.S. Government & Agency18.5%Yankee/Foreign0.0%Total100.0%

[BarbaraAnne]

Originally Posted by TexasGal

I have a large amt of 401k money in Vanguard's Prime MM. I've asked several people if I need to worry and they said no. Vanguard has govt MM fund, but I can't move from one MM to another fund in the same low-risk category. I always thought that short of FDIC insured money in a bank the Vang Prime MM was as safe as it could get. Not so?

Issuer by %
Bankers Acceptances6.0%Certificates of Deposit49.9%Commercial Paper20.7%Other4.9%U.S. Government & Agency18.5%Yankee/Foreign0.0%Total100.0%

I don't understand why you can't move the money from Prime to Vanguard Admiral Treasury. I did it last week with one phone call. I was uncomfortable with the credit exposure in the Prime Fund and according to Vanguard's risk analysis on their website, the Treasury Money Market has no credit risk, only interest rate risk. On the other hand, according to the Vanguard website, Prime Money Market does have credit risk. Until this debacle with the subprime mess works its way out of the system, I am not taking any risk with my fixed income. Only FDIC CD's and gov't funds for my fixed income investments,even if the return on the goverment funds is slightly less.

[DblDoc]

Risk is in my equities. FI is in gov't bonds or FDIC insured CD's and high interest savings account at ING.

As an aside I've been slowly weighting my AA more towards FI but lately the market is doing it for me

DD

[audreyh1]

I noticed how some ultra short bond funds like the Fidelity Ultra-short bond fund got hit pretty hard and pretty sudden - a very dramatic drop on 8/3/07. But has this really happened to true MM funds? I'm still seeing $1.00 price on mine.

The Fidelity Floating Rate High Income fund has also been bleeding pretty badly for over a month, but anyone using this as a MM fund should have known better. Any time there is a credit quality scare that fund gets clocked.

Audrey

[Running_Man]

Originally Posted by al_bundy

checked my 401k last night. Principal has separate MM and bond/mortgage funds. checked the holdings and if there is mortgage exposure, it's very little.

need to check my wife's now

It is my understanding it is not mortgage paper that the MM are holding that is in trouble but AA paper for banks in their name that was being rolled every 90 days over. But since mortagages cannot be resold right now noone is willing to relend the money to the bank at AA rate. Therefore the only asset that is left to back the commercial paper the bank can no longer obtain is depreciated mortgage paper. As a for instance a German bank has losses of 4.5 billion on a default from subprime mortgage paper and may not be able to get it's commercial paper rolled over. Therefore the bank if forced cannot come up with the money to repay the commercial paper and will have to sell assets it has on hand to meet obligation which is the subprime paper. Since it is no longer at par the MM will be repaid at less than par unless the bank eats the difference.

If this were to spread to more common areas it would be an ugly scene.....

[cyclone6]

Originally Posted by audreyh1

I noticed how some ultra short bond funds like the Fidelity Ultra-short bond fund got hit pretty hard and pretty sudden - a very dramatic drop on 8/3/07. But has this really happened to true MM funds? I'm still seeing $1.00 price on mine.

The Fidelity Floating Rate High Income fund has also been bleeding pretty badly for over a month, but anyone using this as a MM fund should have known better. Any time there is a credit quality scare that fund gets clocked.

Audrey

Wow - an ultra-short term bond fund is not supposed to do that. Thanks for the heads-up. This is all getting a little scary. Isn't an ultra-short bond fund supposed to be the same as cash? The 5-year chart shows something abnormal:

FUSFX: Basic Chart for FIDELITY ULTRA SHORT BOND FUND - Yahoo! Finance

And then the news of money market funds having problems - at least Sentinel Management Group. Something is up. I'm barely invested in the market, but I always thought "cash" was safe...maybe it still is. I still think there are many, many "experts", "pontificators", "money managers" out there who have no clue whats going on - or where its headed.

I sure as hell don't. But damnit, when I'm mostly cash, I don't want to lose sleep over that! And central bank intervention does not make me feel better - just makes me wonder what the FED and ECB know that they're not willing to tell us.

Your floating rate fund comment was right on the money. I held a closed-end fund, JRO - Nuveen Floating Rate Income Opportunity Fund, for about the last year. It is leveraged, and was paying better than 8%. I had a nice little capital gain in it too - I bought in at $13.29. Made a run to $14.90 or so, and then starting in July, has dropped to $12.23. I sold at $13.49 a few weeks ago, thinking it was not part of my eventual asset allocation plan. I must admit I don't really understand all of the implications of holding such a fund, but one thing is certain - it is now caught up in whatever is going on.

Maybe this all blows over. Maybe not. But I sure wish I had a private line to Bernanke - and that he was a close friend, because one thing I am certain of - these bastards won't tell us the truth (unless they are a close, personal friend) until its over...whenever and wherever that happens to be...

[pedorrero]

Harry Browne (in his 1987 and other books) recommended either T-bills or the (then) only MMF that invests exclusively in them the (now) American Century Capital Preservation Fund I. 100% in U.S. T-bills. Maybe he wasn't so paranoid after all.

[FIREdreamer]

Some reassuring words from the big three mutual fund companies on the status of their money market funds...

Why your cash may not be safe - MSN Money

To summarize their firms have very little exposure to subprime mortgage derivatives and as I understand it, it would take nothing short of a complete collapse of the real estate market for their MMFs to start losing money. Owners of VG prime money market fund, breathe... for now.

[TexasGal]

I went ahead and moved my Prime MM funds at Vanguard to their Treasury MM Fund (100% U.S. Government & Agency). A slightly lower yield than Prime MM but seems safer. I know that I am in the minority here worrying about moving money from "safe" to "safer". But . . . if you can't relax, why not do it? I would love to be in "safest" which for me would be FDIC insured, but I would have to rollover my 401k and I really don't want to do anything with it for 6-8 years. Nothing at Vanguard is insured.

I'll be darned if I want to begin my retirement discovering that my fixed funds are suddenly losing value like sand in an hourglass. Maybe one of these days I'll be more comfortable with this, but I haven't even received my first pension check yet (coming 9/1)!

I've just heard too many horror stories and personally know people who lost almost everything and had to start over at 58 or 59. Doesn't even matter what they were invested in. All that matters to my psyche is that they lost it at such a critical time in their lives and it changed the course of their future.

Maybe the forum needs to have a section titled scared silly (SS) or Chicken Little (CL) ! I admit it, all of the volatility and hype is scaring me. I will go over now and search for those cool-head and stay-the-course comments. I will read them and try to gear up so that someday I might be able to become more like them.

TG

[REWahoo]

[Want2retire]

Originally Posted by TexasGal

I'll be darned if I want to begin my retirement discovering that my fixed funds are suddenly losing value like sand in an hourglass. Maybe one of these days I'll be more comfortable with this, but I haven't even received my first pension check yet (coming 9/1)!

Congratulations on your retirement! This transition period has to be nerve-wracking. At least, it would be for me... I would be asking myself, "Will the pension REALLY arrive as it is supposed to? Will it be as much as I think?"

Originally Posted by TexasGal

I've just heard too many horror stories and personally know people who lost almost everything and had to start over at 58 or 59. Doesn't even matter what they were invested in. All that matters to my psyche is that they lost it at such a critical time in their lives and it changed the course of their future.

Maybe the forum needs to have a section titled scared silly (SS) or Chicken Little (CL) ! I admit it, all of the volatility and hype is scaring me. I will go over now and search for those cool-head and stay-the-course comments. I will read them and try to gear up so that someday I might be able to become more like them.

As one SS/CL to another, I can relate to how you feel! Keep a cool head, stay the course, move your money market funds into Treasury MM if you want to, and think about whether or not you will want to adjust your overall asset allocation a little LATER when the market is up. Going from 75/25 to 60/40 was very helpful in allaying my fears a bit.

[TexasGal]

Totally Perfect. If a picture is worth 1000 words then that one is worth 2000!

REWahoo, I'm beginning to have some of those same sentiments, i.e. "if I owned Texas and Hell, I would rent out Texas and live in Hell." This summer is killing me! Along with chiggers, mosquitos, grasshoppers, and other things I can't even identify, I cannot breathe. I've lived here all of my life and I will never get used to the summers. Maybe it is like having a baby . . . once it is born you kind of forget how bad the pain was. I always seem to think that maybe this year, it won't be so bad! I'm covered in insect bites and do nothing but sweat! Went out while ago to give my poor plants a little water and about a dozen grasshoppers jumped on me (I absolutely HATE them). Then I went around to the side of the house to water a pitiful tomato plant and I guess must have stepped on a wasp nest (usually up high but not this one, it is down under some vegetation). I ran back in the house using the hose as a defensive weapon while the swarm chased me!

I guess my neighbors are used to it by now. I'm sure it is a funny sight from a nice air conditioned house looking out the window. I'm usually jumping around, waving my arms, and running at some point in most of my visits to the outside when it gets this deep into summer!

TG

[TexasGal]

Want2,
Thanks for the support! Worrying gets lonely.

I'm pretty tough in the rest of my life. I am always the one everybody else comes to for support and help and strength. But honestly I can't imagine a worse nightmare right this minute than losing my money at age 60 and right at the very start of retirement (yes, I know there are worse ones so that's just a figure of speech).

I can always go back to work. I was making a pretty nice salary before I quit, and I can go back any time I want to according to the partners in the firm. I don't even have to give up my pension check. That was a hard one for me to believe but true. I can keep drawing my pension while working for them again. However, the very thought of it makes me more than sick. It would have to be a total collapse financially for me to do that.

If I could do anything else other than sit here with my very ill mother, I probably wouldn't be quite as worried. About all I can do while I am taking care of her is sit on the computer and stay connected to the rest of the world. Just so happens that much of the rest of the world that I frequent on the internet seems to be moving toward financial chaos so that is not very comforting.

For now I am going to sit tight and try to be rational. So thanks for your words which were actually very uplifting to me right now. Just knowing that there are other SS/CL's out there is very comforting.

[REWahoo]

Originally Posted by TexasGal

I guess my neighbors are used to it by now. I'm sure it is a funny sight from a nice air conditioned house looking out the window. I'm usually jumping around, waving my arms, and running at some point in most of my visits to the outside when it gets this deep into summer!

In the Texas dog days I try to limit my time outdoors to between 7 PM and 10 AM, and then only when liberally doused with deet. I also have the advantage of living too far from any neighbor to have my fire ant/snake dances witnessed by anyone....

[JohnEyles]

Originally Posted by TexasGal

I went ahead and moved my Prime MM funds at Vanguard to their Treasury MM Fund (100% U.S. Government & Agency). A slightly lower yield than Prime MM but seems safer.

Actually, depending upon your state tax rate, VMPXX may actually
have a higher/equal after-tax yield than VMMXX.