Wednesday, January 27, 2010

Money Market Insanity

This afternoon the SEC voted to allow Money Markets the ability to suspend redemptions. This is MASSIVE news for the market.

Money Markets are funds that invest in "cash" equivalent funds such as treasury bonds, AAA corporate bonds (Walgreens/Microsoft), or municipal bonds. (State government debt.
The goal is to allow investors to receive higher interest than they would at a bank deposit, and the funds are sold as essentially cash that is "risk free."

During the panic in the fall of 2008, one of the money markets "broke the buck" meaning that it would be returning less than 100% on the dollar to investors. The reason for this is because treasury bonds, AAA corporate bonds, and municipal bonds are not cash; they actually have "risk" of loss.

After that specific fund cracked there was a run on all money markets and the Fed had to step in and guarantee 100% on the dollar for every money market in the country.

In order to prevent this from occurring again the SEC has now given money markets the ability to suspend redemptions.

This means if a money market gets in trouble and you ask to have your money back, the money market can tell you "NO." You will not be able to get your money until they decide to allow redemptions again.

After this announcement today, treasury bills (3 month or less government bonds) went negative at -.1%. Buying a treasury bill means you lend the government X amount of dollars for three months (or less) and at the end of that term they give you that money back. Investors are now paying the government to hold their money due to their fear of money markets.

Look for this trend to continue as all debt continues to deteriorate.

The actual proposal voted into effect today can be found here.

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