When Do Money Market Mutual Funds Break the Buck?

[MercyMe]

I can gain roughly 75 basis points for switching my money market mutual fund from SPAXX to FZEXX. I do keep a fair amount of my cash bucket in SPAXX since it pays a teeny bit more than an online saving account. But FZEXX is mostly a muni-based fund, and not a federal government-based one.

What event would cause this fund to break the buck?

(No boo's and hisses please for me keeping cash. )

 

[MercyMe]

Anybody?

Bueller... Bueller... Bueller?

 

[audreyh1]

One money market mutual fund broke the buck in 2008. After that the Fed stepped in to prevent bank runs. There was a major financial crisis and credit squeeze at the time - those are the dangerous conditions for money market mutual funds. https://www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp

The SEC has since reformed retail money market mutual fund rules so some are government funds only and should never break the buck, and others are prime and can float and are also able to stop withdrawals for short periods. Something like that anyway. https://www.sec.gov/spotlight/money-market.shtml

 

[MercyMe]

The SEC has since reformed retail money market mutual fund rules so some are government funds only and should never break the buck, and others are prime and can float and are also able to stop withdrawals for short periods. Something like that anyway.

Thanks. I wonder if this reform had any impact on muni-based MMMF's though.

 

[MichaelB]

What event would cause this fund to break the buck?

A money market fund breaks the buck when it’s assets fall in market value to less than $1 of NAV. All the assets are invested in fixed income, in this case municipal bonds, so three things can cause the assets to lose value. The first is if one of the bonds defaults. The second would be if interest rates rise and cause the market value of the holdings to decline. The third would be if the interest earned by the fund is less that the expenses charged by the fund.

In these cases, the loss would cause the net asset value of the money market fund to fall below $1.

Look at the FZEXX holdings (here) and judge the risk level for yourself.

Default is unlikely because the fund is required to invest in high quality assets. It can happen though - remember Lehman?

Interest rate risk is also unlikely because the holdings are very short term, which is a low interest rate allocation.

Fund management expenses greater than interest earned in assets is possible, but in a zero interest rate environment, like the one we were facing 2 years ago.

 

[audreyh1]

Thanks. I wonder if this reform had any impact on muni-based MMMF's though.

I think muni-based funds are lumped in with the same rules as for government-backed funds.

More info here: https://www.investopedia.com/terms/m/money-marketfund.asp

You can actually see the float on your money market fund if you go looking for it - it’s out to 3 or 4 digits after the decimal. One of my government money market funds even paid a small capital gain a couple of years ago. I think it must have been related to the float.

 

[MercyMe]

Thanks for the info. Much appreciated.