Money Market & CD safety

[BrianB]

We have 2-3 years of spending money at Fido. About half is in government money market funds (SPAXX and FDRXX) and half is in brokered Wells Fargo CD's with maturities of 6/12/18/24 months.

My (purely theoretical) questions are:

1. What could cause the MM funds to "break the buck" (value drop below $1.00 per share)? In 2008 Reserve Primary fund (not a government MM fund) had a big Lehman Brother's holding that became worthless overnight and the value dropped to $0.97 / share. They were locked for a seven day cooling off period. We could weather a 3% loss but we count on the liquidity. What should MM fund holders watch out for?

2. Has anyone here ever had a CD default and needed to get reimbursed by the FDIC? Did it take a long time to get the money?

Strange times we're living in…

BrianB

 

[Another Reader]

We have 2-3 years of spending money at Fido. About half is in government money market funds (SPAXX and FDRXX) and half is in brokered Wells Fargo CD's with maturities of 6/12/18/24 months.

My (purely theoretical) questions are:

1. What could cause the MM funds to "break the buck" (value drop below $1.00 per share)? In 2008 Reserve Primary fund (not a government MM fund) had a big Lehman Brother's holding that became worthless overnight and the value dropped to $0.97 / share. They were locked for a seven day cooling off period. We could weather a 3% loss but we count on the liquidity. What should MM fund holders watch out for?

2. Has anyone here ever had a CD default and needed to get reimbursed by the FDIC? Did it take a long time to get the money?

Strange times we're living in…

BrianB

Your concerns are similar to mine. I have been thinking of transferring all of the remaining 2020 RMD's from SPAXX at Fidelity to one or more banks. The last thing I need is to have some market disruption cause the account to be locked up.

One thing that is giving me pause is that in 2008, RMD's for 2009 were suspended. If RMD's were suspended in this crisis, I would likely leave the money in the IRA's but consider transferring the next couple of years of estimated RMD's as IRA's to FDIC insured accounts.

 

[audreyh1]

There was a major reform on MM funds in 2016 to protect against a 2008 like event. Most retail MM funds, especially used for core accounts like SPAXX were converted to Federal Govt only short term debt.

 

[BrianB]

Just a few months ago I was considering moving some of this money to an ultra-short term corporate bond fund to get the higher rate. Our Fido advisor said "Don't do it!" and now I'm glad I listened to him.

We survived the Great Recession (and ultimately prospered), but then we were both working and had less free time to worry about such things. One of the downsides of retirement is the tendency to watch too much news on TV and the internet!

I think I will go back to the bathroom remodeling project we're in the middle of - that should keep my mind off gloom-and-doom scenarios for a while.

 

[Another Reader]

There was a major reform on MM funds in 2016 to protect against a 2008 like event. Most retail MM funds, especially used for core accounts like SPAXX were converted to Federal Govt only short term debt.

I'm concerned about the overall health of the credit markets. I'm also concerned about all the the repurchase agreements and similar tactics used to juice yields in many of those MM funds. Fido has a treasuries-only MM fund, FDLXX, and Vanguard has VUSXX, where I keep a substantial amount of taxable cash.

I just shifted about half of the cash set aside for the next three years of RMD's from SPAXX to FDLXX. I decided to cover the next two months of RMD's by withdrawing them now. I have no specific information that caused me to do this, just a general feeling that we are entering uncharted waters and there may be rocks ahead.

 

[Freedom56]

2. Has anyone here ever had a CD default and needed to get reimbursed by the FDIC? Did it take a long time to get the money?

Strange times we're living in…

BrianB

If the CD is FDIC insured your are covered up to 250K per depositor or $500k for joint accounts. I had a $100K CD transferred to JP Morgan after Washington Mutual folded back in 2008 and JP Morgan took over the assets. The process was automatic.

 

[sheehs1]

Back in 2008/2009 I had a brokered CD that went belly up or whatever you call it. Reimbursement was immediate and automatic ...
I bought 5 or so so corporate bonds last year (Ford, GM, QVC) Investment grade (but during times like these, we know how that goes!) . Prior to doing so I asked the brokerage firm about their defaults, percentages, etc. and had a conversation with the bond department. The answer was no. But these are strange times. Tried to sell them about two weeks or so. The price then was 88 cents on the dollar-credit markets were tightening and a bit dislocated.
The amount I invested in these was about 3% of net worth and 5.6% of investable assets. Too late to do much about them now...so I'll just have to wait and see.

 

[Explore]

If the CD is FDIC insured your are covered up to 250K per depositor or $500k for joint accounts. I had a $100K CD transferred to JP Morgan after Washington Mutual folded back in 2008 and JP Morgan took over the assets. The process was automatic.

I was an advisor during the 2008-09 great recession. The FDIC insured cd's cash was in our customers account many times before we were notified the bank went under.

 

[upset264]

With an eye on safety I bought some BIL (SPDR Bloomberg Barclays 1-3 Month T-Bill ETF) in a Fidelity account and some SHV (iShares Short Treasury Bond ETF) in a Vanguard account. (SHV is treasuries under 1 year).

 

[Helios]

Cds

In the past I had some cd's in a bank that failed. The bank was not purchased by another bank.
I called Resolution Trust, a govt office that was in charge of the closing. Courteous and competent people.
Mailed me a check , took about a week.

 

[michelek]

So the money market accounts at Fidelity are not FDIC insured? However if we pull them this year they count as income and we pay a 10% penalty . Unless there is an insured option at Fidelity?

 

[brewer12345]

So the money market accounts at Fidelity are not FDIC insured? However if we pull them this year they count as income and we pay a 10% penalty . Unless there is an insured option at Fidelity?

You could switch to a government or treasury MMF. They only invest in US government obligations.

 

[Explore]

So the money market accounts at Fidelity are not FDIC insured? However if we pull them this year they count as income and we pay a 10% penalty . Unless there is an insured option at Fidelity?

I have Fidelity IRA's and yes, they do have a FDIC insured cash account.

 

[BrianB]

Bumping this thread that I started. It was just two months ago, but it seems like eons.

In Fido's "Investor Community" forum a person posted an email from TIAA-CREF stating that they were waiving fees on MM holdings for the rest of 2020 so that their MM funds would not go negative return (Break the Buck).

Fido has in their fine print that they MAY reduce fees to keep MM funds at $1.00, but no official statement or comment yet.

With MM rates now at 0.01% it seems there is no reason to leave money in a MM fund that isn't FDIC insured. So today I moved all our SPAXX and FDRXX monies into Fido's FDIC insured sweep account.

The one exception is our after-tax investment account. Fido only lists two MM funds and "FCASH" as options. FCASH seems to be a loan to Fido with their good faith the only backing. This account usually has only $2-4k in cash so I'm leaving it in SPAXX for now.

BrianB

 

[frayne]

Around the same time as your original post I took a chunk out of FIDO FDRXX and put on a three month CD just for the FDIC protection. Come July I'm going to have to probably make the same move again. Crazy times for sure.

 

[BrianB]

Fido currently shows you have to go up to to a 12 month term to get 0.20% on their brokered CD's

Since this is a large part of our spending money for the next 4 years I don't want to go long term CD's.

Much of this money is in IRA's (Trad. & Roth). I don't really want the hassle of creating new IRA's at another location to get just 1.00%.

I'm leaning towards 25% in a 6 month CD at 0.15% and 25% in a 12 month CD at 0.2%. That would net us all of $137.50 interest total but would be FDIC insured.