Money Market Fund Guarantee Expires

Besides carrying lousy interest rates, some of the safety that has been imbedded in money market mutual fund accounts for a year-- a government guarantee-- is set to expire today.

One of the many casualties of the financial crisis, these funds were the quick recipient of Uncle Sam's backstopping of all things financial when the Reserve Fund "broke the buck" meaning its value fell below even a one for one dollar return of a customer's money. The subsequent run on money market mutual funds pulled billions away from them and presumably into safer investments such as straight Treasuries in September of 2008. Government was quick to step in. No more:

The Treasury is allowing its year-old guarantee of money fund assets to expire, in one of the first big reversals of the government’s involvement to stem the financial crisis.

The unprecedented backstop was put in place a year ago after one of the nation’s biggest money funds, the Reserve Fund, suffered a run on assets because of losses tied to Lehman Bros. IOUs that it owned.

The government’s blanket guarantee of fund accounts had the desired effect: After a record outflow of $120 billion in the week ended Sept. 23, fund assets quickly stabilized. Confident investors soon began adding more cash to the funds -- even though the Treasury’s guarantee only covered industry assets as of Sept. 18.

After hitting a record high of $3.85 trillion in January money fund assets have been gradually declining, reaching $3.45 trillion this week. But the slide more likely is the result of investors pulling cash to invest in riskier assets (i.e., stocks and bonds) than because they’re worried about the U.S. guarantee expiring.

With the Federal Reserve committed to holding short-term interest rates near zero indefinitely, the funds are earning little on the short-term corporate and government debt they buy. Their investors, in turn, are earning next to nothing, even though most funds are waiving all or most of their management fees: The average taxable money fund pays an annualized yield of just 0.06%, according to IMoneyNet Inc.

I doubt that expiry will cause investors to seek riskier assets. Buy into a 55%+ rally? More likely, the monies will stay put.