Credit crisis question.

[JB]

Hank Paulson has been saying that companies are having difficulty with short term financing. I was at an investment seminar a few months ago, and the analyst said the same thing. If this is true, why is my money market fund paying 2%? Shouldn't the lack of available credit drive rates up? I asked the same question to the analyst and he didn't have an answer. Bet someone here does.

 

[2B]

Everyone is risk averse. Any company without triple A credit is being avoided even by the money market funds. The recent "breaking the buck" of a major fund has everyone scared. Companies that could otherwise get decent short term rates now can't get any credit at any price.

 

[ziggy29]

Many entities are afraid to lend money at almost any price because the current panic mode is afraid to lend to anyone. This is the classic "credit crunch" at work. Almost no entity is trusted.

 

[Gone4Good]

Hank Paulson has been saying that companies are having difficulty with short term financing. I was at an investment seminar a few months ago, and the analyst said the same thing. If this is true, why is my money market fund paying 2%? Shouldn't the lack of available credit drive rates up? I asked the same question to the analyst and he didn't have an answer. Bet someone here does.

A couple of reasons 1) The MM is invested in CP of varying maturities. Only a portion has thus far been re-invested at higher rates. 2) Flight to safety. Funds are likely hoarding cash and investing in short-term treasuries, instead of CP. Short-term treasury yields dropped to zero at the height of the crisis last week.

 

[al_bundy]

they aren't much higher now, 3 month t bills are .36%

 

[JB]

Thanks, I am getting a better understanding. One thing that's probably relevant is that the Spread in the Discount Rate is off the chart.
I assume this doesn't affect my MM fund because it's all AA.

 

[Nords]

Thanks, I am getting a better understanding. One thing that's probably relevant is that the Spread in the Discount Rate is off the chart.
I assume this doesn't affect my MM fund because it's all AA.

So far!

Another reason that rates aren't going up is because the Fed is injecting as much money as the Treasury can print. No one's going to pay you 5% for your 2% money when the Fed will make them a better deal.