The curious state of money market funds, or is unsettling a better adjective

Look at these current yields on some of the more popular large money market funds.
---Fidelity Money Market - 0.33%
---Fidelity Cash Reserves - 0.34%
---Fidelity New York Muni - 0.01%
---Schwab Money Market - 0.01%
---Schwab New York Muni - 0.01%
---Morgan Stanley Smith Barney Bank Deposit Program - 0.03%
---Etrade core money market - 0.03%

These funds are huge because they are the most conservative default option for these major retail brokers. These yields are amazingly low. Thinking about the Schwab, MSSB, and E-Trade yields, as well as the Fidelity Muni, one can't help but wonder whether any even short term disruption in the credit markets would put pressure on the "buck", as in "breaking the buck".

Look at this dynamic at Schwab, which charges some of the highest expenses in the money fund industry. It has two money market funds, one for small investors that requires an expense ratio of 0.65% and one for investors who can initiate with $25,000 that has an expense ratio of 0.49%. Both are yielding the above mentioned 0.01% They are both basically the same investments. So the question is, "Is the lower expense ratio fund already subsidizing its stated expense ratio to hold the yield above zero?"

Short term yields across all instruments are historically low, but with these yields and even implied risk, one could ask why not a mattress, a safe deposit box, or a hole in the backyard for cash. It turns out, after 25 years of being outgunned by money market funds, that banks are now the viable alternative. Chase has a premier savings account that has tiered yields of between 0.25% and 0.75%. BofA has a hybrid CD/money market that yields 0.90%.

What does all of this mean? A few suggestions are:
---In these challenging credit markets, money market fund managers have become intensely risk averse, taking only the shortest commercial paper maturities and the most highly rated firms. Managements must be saying to the fund managers that they cannot risk the firm on a "break the buck" situation.
---The commercial paper market is still just limping along and, while not frozen like a year ago, only better issuers are finding a liquid market and they pay the least for their money, even more so as this situation creates competition among funds to access their paper.
---As banks with their FDIC insurance and with their aggressive push to continue raising funds showing success(they'll take as much cushion for any part of their balance sheet that they can get since anything is better than preferred stock with onerous dividends and political control required by the government), their participation in the commercial paper markets has diminished. The tables have turned and they are now actually disintermediating the money market fund industry.

There have been concerns voiced about the money market fund industry raised ever since the industry pioneer Reserve Primary Fund broke and traded at 97 cents on the dollar last fall. There are calls for regulation led by Paul Volcker and a recent industry report described them as having "no capital, no supervision, and no safety net". The fund industry counters with a commitment to supporting the full value of their funds and an emphasis on an almost impeccable track record.

This is a big story. If it takes a wrong turn for whatever unexpected event in the overall credit markets there could again be chaos or panic. If rates begin to move up as the economy improves and the deficit spending makes the market demand higher rates across the yield curve, the issue will be moot for now. Today it is something to think about.