Money Market Risk

[W2R]

Bob Brinker had an interesting piece on his radio show this afteroon about Money Market accounts with substantial investments in Fannie Mae and Freddie Mac. He feels they could be impacted by the recent situations of these companies.

His opinion is that first things have to get worse. Then it has to become a political football, with some politicians saying to bail out the money market funds, and others not wanting to rescue the "fat cats" with money in these funds.

He advised the caller who had money in such a money market, that there is enough risk that he would move his money elsewhere.

Interesting take on the recent problems, and I am sure many here could add interesting and informative comments on this subject if they have not already in other threads.

 

[lazygood4nothinbum]

hey, stop trying to scare me.

 

[W2R]

hey, stop trying to scare me.

Brinker did a good enough job of scaring me, first! I still have a lot of my windfall in money market.

It appears that VMMXX (Vanguard Prime MM) was about 7.5% Fannie Mae and 8.8% Freddie Mac, at least back in October 2007. Something like VUSXX (Vanguard Admiral Treasury MM) is all treasuries and apparently safer, but then the interest rate is lower as well.

 

[FIREd]

Well, when the credit crisis first started I moved my EF from Vanguard's Prime Money Market fund to Vanguard's Federal money market fund to remove credit risk. Now, in theory, the Federal MMF is still supposed to have zero credit risk because almost all the money is invested in AAA-rated US government and Agency bonds... But now that agency bonds could be at risk too, what's next, move the money to the VG Treasury MMF or go back to a FDIC-insured high yield savings account? This thing is getting old...

 

[unclemick]

Hmmm - Vanguard's Prime MM is where I park my annual auto deduct from Target and spend it during the year.

Hmmmm -

heh heh heh - probably will do nothing. Yet.

 

[W2R]

Hmmm - Vanguard's Prime MM is where I park my annual auto deduct from Target and spend it during the year.

Hmmmm -

heh heh heh - probably will do nothing. Yet.

By the way, I didn't get the percentages of Fannie Mae and Freddie Mac in VMMXX from any authoritative source. They are just ballpark that I computed very roughly from an old report on the Vanguard VMMXX webpage. VMMXX might have dumped them by now, for all that I know.

I moved about 2/3rds of my VMMXX to VUSXX this afternoon, right before posting this thread. That was very likely an over-reaction but I don't see how it can do any harm.

 

[ziggy29]

Looks like the MMF yields of Treasury funds are going to crash again.

 

[Lsbcal]

I only have a modest amount in cash. Moved most of it over to a WAMU on-line savings account that's linked to my checking. It's paying 3.25% and is FDIC insured and has been at this rate for some months now. I believe you can only get this rate on-line. Better then the 2.2% in VG Prime right now.

 

[FIRE'd@51]

This is very low on my list of things to worry about (maybe a footnote of a footnote). Before this happened I am sure the Fed would open the discount window to FNM and FRE so they could roll over their short term paper. Vanguard would then have plenty of time to decide if they wanted to roll it over or re-invest the money elsewhere. If at the time, the paper were downgraded below A, I don't think the fund could buy it anyway, as 100% of their funds are invested in A or better paper.

 

[RockOn]

Wow, and I thought commenting about the possibility of the market going down was being taken as exteme thinking.

 

[rogersteciak]

Parking money in safer places and taking less interest income is not a bad idea, as Will Rogers used to joke during the Great Depression: Return of principle is more important than return on principle.


When the value of a money market fund drops below $1 a share, it's known as "breaking the buck." Worries about this happening surface every once in a while:

• November 2007: Will Your Money-Market Fund 'Break the Buck'? - washingtonpost.com
• June 2003: INVESTING / Breaking the buck

I have most of my money invested through a major Wall Street brokerage firm. A few years ago, it got its own bank and became a member of the FDIC. Most of my uninvested money market cash gets swept into an FDIC-insured savings account. I remember being bummed about it at the time because the interest I received dropped by almost a percentage point. But in hindsight, I'm thankful now that it happened.

 

[Notmuchlonger]

Wow, and I thought commenting about the possibility of the market going down was being taken as exteme thinking.

Nah all kinds of people are busy checking their shorts

 

[summer2007]

Thanks for posting this.

I have some money in Vanguard's prime MM and didn't realize the risk.

I remember reading the boards and seeing a short term bond fund by Schwab recommended by someone on here. I have always seen the short term bond funds go sideways or up but rarely down more than just a little bit.

Well I went and looked at this fund and it lost like 20-30% if I remember right and I was shocked. If I risked a lot of money to get a 4% return and ended up loosing 30% I would be really upset. I didn't realize until I saw that fund that you could have that happen.

So I guess it could happen to a MM fund just as well.


I don't really understand the difference in safety between the federal and treasury MM by vanguard though.

Jim

 

[W2R]

I don't really understand the difference in safety between the federal and treasury MM by vanguard though.

Jim, in evaluating Vanguard MM funds it helps to check out the information on each fund's Vanguard webpage. The page for the Vanguard Federal MM fund is at https://personal.vanguard.com/us/funds/snapshot?FundId=0033&FundIntExt=INT . The page for Vanguard's Treasury MM fund is at https://personal.vanguard.com/us/funds/snapshot?FundId=0050&FundIntExt=INT

Then, click on "holdings" to get an overall idea of what the fund invests in. Click on "Who should invest", too, to find out some more hints about whether that particular MM fund is suited to you. Then, go to "Prospectus and Reports" and browse to find out more specific information.

It's not likely that any Vanguard MM fund would "break the buck" (and thanks, Rogersteciak for the terminology!). But in uncertain economic times such as we have been having, I believe it's something to at least view as a remote possibility.

By the way, according to their February 29, 2008 semi-annual report, it appears that the percentages of VMMXX holdings in Freddie Mac and Fannie Mae decreased quite a bit since 2007. So, VMMXX fund management is probably way ahead of us on thinking about such things.

 

[FIREd]

I don't really understand the difference in safety between the federal and treasury MM by vanguard though.

In theory there should be no difference. The Treasury MMF invests in AAA-rated Treasury bonds which are 100% backed by the US government, making them some of the safest bonds in the world. The Federal MMF invests in AAA-rated treasury and agency bonds. Agency bonds are emitted by entities that are theoretically fully backed by the US government (like Fanny and Freddy), so there should be no credit risk associated with them. But last week, some government officials seem to imply that although, historically, the US government has lent its AAA-rated creditworthiness to such agencies, it was in no way obligated to bail those agencies out. So, in essence, those agency bonds could become more risky than what their AAA rating implies. I personally don't believe that the government will let Fanny and Freddy fail in the end, but this little episode has cast a shadow on those agency bonds that were always assumed to be virtually as safe as treasuries.

 

[Midpack]

That's it, I'm emptying out all my accounts and changing my AA to 50/50. 50% in the mattress and 50% buried in jars in the back yard. Trouble is, I don't think I'll be able to sleep at night not only for the lumps in the mattress but in knowing my purchasing power is eroding away by leaps and bounds, guess I should just spend it all now while it's at it's peak purchasing power. Think I'll buy a big house and an Escalade and go from there...

 

[audreyh1]

Here is what one of my bond fund managers (Metropolitan West) has to say about the Freddie and Fannie panic as of July 10 2008. They are NOT concerned about the bonds defaulting, giving the "too big to fail" argument which I tend to agree with given that those companies provide HALF the US mortgage loans.

The bottom line as we see it is that FNMA and FHLMC will be afforded every opportunity and given all latitude [by the government] to continue their operations in an uninterrupted basis.

from (PDF link) Memo Regarding FNMA & FHLMC

Audrey

 

[FIREd]

That's it, I'm emptying out all my accounts and changing my AA to 50/50. 50% in the mattress and 50% buried in jars in the back yard. Trouble is, I don't think I'll be able to sleep at night not only for the lumps in the mattress but in knowing my purchasing power is eroding away by leaps and bounds...

LOL! If the lumps in your mattress prevent you from sleeping at night, I would be delighted to help relieve you of that problem...

Seriously though, there is still plenty of ways to park your cash safely without losing too much of your purchasing power (FDIC-insured high yield savings accounts or CDs). Nothing to lose sleep over. But I think that W2R's point is valid: often people put their money in MMF and other "safe" vehicles and don't understand the risks. So without succumbing to paranoia, I think it is important to discuss those risks.

 

[RockOn]

Here is what one of my bond fund managers (Metropolitan West) has to say about the Freddie and Fannie panic as of July 10 2008. They are NOT concerned about the bonds defaulting, giving the "too big to fail" argument which I tend to agree with given that those companies provide HALF the US mortgage loans.

from (PDF link) Memo Regarding FNMA & FHLMC

Audrey

They are probably right but I find it to be cute that bond fund managers (financial industry experts) who likely had no idea this was coming and were probably leveraged to the hilt, are now assuring us everything is ok since "they are too big to fail". This is too much.

 

[OAG]

Never say never! Or said another way "they are too big to fail". WTH Indy Mac will be back Monday with all new stationary (have to add "Federal" to it). Only shy about half a Billion, or was it 4 Billion or 9 Billion, who really knows the articles all bat those and other numbers.

 

[audreyh1]

They are probably right but I find it to be cute that bond fund managers (financial industry experts) who likely had no idea this was coming and were probably leveraged to the hilt, are now assuring us everything is ok since "they are too big to fail". This is too much.

I can see how you might think this in general. But I don't think this generalization applies to the bond gurus at Metropolitan West.

Some other papers from them: MetWest Our Thoughts

Also a general note: If the bond market is not concerned about agency debt (given that the credit spreads have not seriously widened on agency paper in spite of the agency stock doing so poorly), money markets should have even less worry.

Audrey

 

[d]

there's a world of difference between holding Fannie Mae and Freddie Mac bonds and holding their stock ...mmfunds should be okay.

 

[Lsbcal]

Hopefully my WAMU account is safe since it's FDIC insured. I notice that the stock is under $5 so the stockholders are probably nervous. Looking at Indymac it took it about 2 months to go from $5 to near zero now. These are the times to understand the different risk levels for different financial instruments and who is taking on the most risk. A few months ago when Countrywide was in the center of the news, Larry Swedroe said he was advising a relative to put money into their CD's which were paying better then average because of the bad news. Apparently he viewed those insured CD's as extremely low risk. Perhaps the WAMU account is paying well right now for similiar reasons.

 

[RockOn]

I can see how you might think this in general. But I don't think this generalization applies to the bond gurus at Metropolitan West.

Some other papers from them: MetWest Our Thoughts

Also a general note: If the bond market is not concerned about agency debt (given that the credit spreads have not seriously widened on agency paper in spite of the agency stock doing so poorly), money markets should have even less worry.

Audrey

I don't know anything about them, just lumped them in. Sorry if they don't deserve it.

P.S. I just read one of their latest articles "This time is different". They made the bullish case for buying distressed MBS. It think it was written in early June. They may be right, but maybe not, I'm not sold.

 

[audreyh1]

P.S. I just read one of their latest articles "This time is different". They made the bullish case for buying distressed MBS. It think it was written in early June. They may be right, but maybe not, I'm not sold.

These guys are known for sometimes taking a very long term view and walking out pretty far on the risk curve. It's good to realize that before you invest in one of their bond funds - you can suffer some serious short term gyrations.

Audrey