Tuesday, September 22, 2009

Those money market funds

A post here on August 26 focused on the imperceptible yields at most money market funds today and wondered what the margin of error had become. I'm still wondering about that. Last week the Fed, as planned, ended its one year guarantee of all money market funds that was put in place when everything was unraveling. Last year we learned that in financial markets there is nothing without risk.

So what I'm thinking about and acting on is this idea that there might be risk in money funds now. When a money market fund "breaks the buck" a panic sets in and illiquidity takes hold. Unless we repeat last year's almost unprecedented freeze up of credit markets, the Fed will not again step in with a blanket guarantee if some funds begin to have trouble. It's the "moral hazard" issue, you know, if nobody loses why play safe. So that won't happen again. The thought here is that if some funds have trouble, the Fed will step in with a liquidity line at a harsh interest rate that will be backed by every bit of cash and every asset that the respective mutual fund has. That will provide stability, but as it is worked out there will be a period of illiquidity for the clients, and maybe small losses, as the clearing banks work to untangle the mess. To the fund firm it would mean some losses or, if they are not well diversified, a shut down.

So for years money market funds made me a lazy investor for the most conservative part of a portfolio. Completely liquid, 4% or 5% yields(higher effective yield on muni funds at times), and no principal risk, I took it for granted and spent my time on equities. A yield and risk forced shift from money markets has been underway this past spring and summer, a shift to short term and intermediate term Treasury ETF's, to intermediate corporate and muni bond indexes, to a broad commodity ETF(DBC), an agribusiness ETF(MOO), and some other more risky but interesting funds like Fidelity Strategic Value(FSICX) and Putnam Master Intermediate Income Trust(PIM). Those last two both combine investments in U.S. governments, emerging markets, and high yield bonds. The Fidelity fund has a higher level of governments at 40% and is more stable but with a lower yield than the Putnam fund.

I still have some money market fund exposure and much more substantial bank savings exposure than last year with 75 to 90 basis yields, but these newer investments are working fine. They need to be watched, so it's no naptime like when I just parked liquidity in the money markets, but it's more interesting.

All of this may be wasted breath or keystrokes as markets are continuing to slowly improve. When the insightful, entertaining but almost constant bear Jim Grant is quoted in the Wall Street Journal yesterday saying "not only does the rise and fall of the averages reflect economic reality, but it also changes it" as part a bullish call for an extended rebound, money market funds could represent no risk other than lack of return and active portfolio moves could be a good bet.


Anonymous Anonymous said...

Jim Grant is one of the great authorities on the history of credit and banking, but he also is a notoriously poor stock picker, I mean always wrong. Watch out.

2:19 PM  

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