Avoid Broken Buck Syndrome with Treasuries Money Market Funds

by: Richard Shaw September 18, 2008    
Richard Shaw

Richard Shaw

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You may have moved to the sidelines with cash to avoid the current market train wreck.  If so, that was a good idea.  But how safe is your cash?

If the money market fund owns paper from failing companies, it could result in “breaking the buck”.  That would mean a capital loss for you.

If you have money in a safe harbor, that harbor should actually be safe.  Our opinion is that a truly safe harbor for short-term cash holdings is a 100% Treasuries money market fund.

We suggested that investors switch money market assets to Treasuries-only money funds in August 2007 and again in July 2008.  Today that advice is even more relevant..

Two money funds “broke a buck” in the last few days, one available to the public and one used by local governments to invest their cash reserves.  More may be coming.  Here is what Bloomberg reported:

Sept. 17 (Bloomberg) — Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.

“This is going to unsettle investors and probably create further runs on other money funds,” Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island, said in an interview.

The $260 million Colorado Diversified Trust has also fallen below $1 a share because of losses on New York-based Lehman’s debt, according to the S&P statement. The fund pools investments for state and local governments and schools, according to its Web site. All assets, excluding Lehman commercial paper, are set to be transferred today to the Colorado Local Government Liquid Asset Trust, S&P said.

This crisis will end, but until it does, we don't think you should reach for money market yield.  We suggest you reach for the cold comfort about capital preservation.

If Bear Stearns, Fannie Mae (FNM), Freddie Mac (FRE), Lehman Brothers (LEH) and AIG (AIG) can go insolvent, so can and probably will many others.

Our advice would be to switch your money market assets to a Treasuries-only money fund.  Two examples are Schwab’s SWUXX and Vanguard’s VUSXX.  Fidelity has a Treasuries money market FDLXX, but it is only required to buy 80% Treasuries.

When the current credit meltdown is well past, you can switch back to a higher yielding money fund, but today the name of the game is risk management, not pursuit of yield.

On a credit and default risk related matter, see our recent article about ETN counter party risk.

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This article has 10 comments:

  •  
    Sep 18 07:54 AM
    "When the current credit meltdown is well past, you can switch back to a higher yielding money fund, but today the name of the game is risk management, not pursuit of yield."

    Paraphrasing, we may seek higher yields after the election when a responsible government is in place with sensible, trustworthy, conscientious, dependable, honest, and LEARNED individuals in charge!

    Reply | Link to Comment
  •  
    Sep 18 08:45 AM
    jse17
    Boy are you dreaming!?!? I wish you were right but.....
    The only one who understood what is happening was Ron Paul.

    Austrian economics predicted this economic crisis well in advance.
    I am not sure if McCain or Obama ever took an economics class.
    And I will wager you that Bernanke and Paulsen, AND any other people McCain/Obama may hire to help them, took the WRONG economic classes.
    We havea minimum of two more years of economic bad news with the current wrong-headed policies in place. If they keep doing the same as they have been, it will be two more decades!
    Buy gold and pray.
    Reply | Link to Comment
  •  
    Sep 18 11:08 AM
    DenisL hit the nail on the head. Look no further than those leaders who are suppose to balance the Presidency. They had hearings and supported the very institutions that have failed or are failing then later took huge campaign contributions. Honesty, knowledge and all the rest of that stuff is a pipe dream. Yes DenisL Ron Paul has been the one with the knowledge and integrity.
    Reply | Link to Comment
  •  
    Sep 18 11:38 AM
    When will Americans realize they are not as smart as they think.
    Reply | Link to Comment
  •  
    Sep 18 12:21 PM
    The easiest way to park money in Treasuries and leave it there is with ETFs: I bought SHY and SHV.
    Reply | Link to Comment
  •  
    Sep 18 03:10 PM
    Two other drawbacks of the Fidelity Treasury Money Market Fund are that it has a $25,000 minimum investment, and that you cannot elect it as your core money market account. That means that if you wish to do any trading you have a day's lag going and coming. Day One, you have to sell the Treasury Money Market, and let it take a day to settle in your Fidelity "core" Money Market Account. 24 hours later, after the money has "settled", you can make your trade. So, you have additional market risk, and a cumbersome process anytime you want to move money around - to buy or sell.
    Reply | Link to Comment
  •  
    Sep 18 05:24 PM
    Y.I.

    Those are not money market funds and their value fluctuate. They do not provide the safe harbor of a Treasury Bills money fund.
    Reply | Link to Comment
  •  
    Sep 18 05:39 PM
    dir

    Good point. The Schwab fund is a sweep account. It can be the core cash account and there it automatically sweeps in all cash and pays out to settle as needed.

    I must correct myself. The Schwab prospectus only requires 80% Treasuries, but the actual holdings are 100% Treasuries with maturity dates less than 12 months as of the most recent published portfolio listing.
    Reply | Link to Comment
  •  
    Sep 18 06:16 PM
    I was thinking there was a difference between a "money market mutual fund", and a "money market account", the former offered by brokers and investment banks and are not FDIC, while the latter offered by savings banks are FDIC. One problem is that the different institutions and their products appear to have merged together, so we get ambiguous names like "money market fund"
    Reply | Link to Comment
  •  
    Sep 20 01:46 AM
    I followed this advice but still got caught in the Reserve Fund mess through TD Ameritrade. I have a LOT of cash in the Reserve US Treasury Fund, held in various TD accounts. On 9/17, I instructed TD to redeem all of those shares. That hasn't happened yet, and neither TD nor the Reserve Fund will say when it will happen. My money is tied up--I cannot trade or transfer the funds to another broker. I keep telling myself that my money is safe--after all, the fund is 100% US Treasuries. But the Reserve is embroiled in a chaotic situation. The SEC already has given them permission to suspend redemptions in two funds: Primary and US Government. A little voice in my head asks if I could lose money here. What if the Reserve goes out of business? What will happen to my money? Will the Treasury's plan to insure money market funds be applied retroactively to a situation like mine?
    Reply | Link to Comment
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