Given recent questions about money market funds, it seemed worthwhile to post a few links with comments.
Basic background on types of MMFs (from Vanguard):
Money market reform: What you need to know (2014)
https://personal.vanguard.com/pdf/VGMMR.pdfAside from institutional MMFs, there are government MMFs, prime MMFs, and muni MMFs. Government MMFs keep 99.5% of assets in federal government securities, cash, and repurchase agreements backed by federal securities. They are considered the safest (but see below), and are not required to impose redemption restrictions in times of stress. Prime MMFs are taxable MMFs that don't meet the 99.5% requirement (e.g. holding corporate paper). Muni MMFs hold (mostly) state, municipal, and territorial (e.g. Virgin Islands) paper.
Splitting hairs on government MMFs, the safest are pure Treasury funds. While the funds themselves are not guaranteed by the Treasury, the underlying securities are. Other government funds may hold agency securities that are not backed by the full faith and credit of the government. See, e.g.
Northern Trust US Government MMF NOGXX.
Non-Treasury funds may also hold repurchase agreements. These not only introduce another (small) level of risk (see this
Schwab paper) but are also not state tax-exempt. A few states (Calif., NY, Conn.) tax 100% of a MMF's income if too much of it comes from state-taxable paper like repurchase agreements.
Retail prime and muni MMFs must impose gates and/or redemption fees in times of stress. That's said to happen if a fund's percentage of "highly liquid" assets fall below certain thresholds. Except for muni MM funds, at least 10% of assets must be in cash, Treasuries, or securities that mature within one day. There's also a weekly threshold of 30% which applies to muni funds as well as to prime funds.
https://www.sec.gov/news/press/2010/2010-14.htmBecause of the possible restrictions on redemptions, I would keep some cash in a bank or government MMF. At least enough for a couple of weeks, which is about as long as redemptions can be held up (10 business days).
Aside from liquidity, there's the risk of breaking a buck. "[G]overnment and retail money market funds are allowed to try to keep their NAV at a stable $1.00 per share. These funds do this by using special pricing and valuation conventions when valuing the fund assets. ... If one of these money market fund’s NAV deviates by more than half a cent from $1.00, the fund would have to re-price its shares to something other than $1.00, which is known as “breaking the buck.” Therefore, if it deviates by more than half a cent below $1.00 (as one money market fund did in 2008 due to losses in the underlying investments), investors in the fund will likely lose money."
https://www.sec.gov/oiea/investor-alerts-bulletins/investor-alerts-mmf-investoralerthtm.htmlFunds are now required to post their liquidity figures and their NAVs (out to four places) daily. So you can see how close they are coming to imposing redemption gates or breaking a buck. OJ asked about SWKXX. This is a good case study, and I suspect typical of muni MMFs these days. Its
NAV has dropped in the past week from $1.0002 to $0.9987. While still comfortably about 99½¢, the speed of the drop invites close monitoring. On the other han
d, its weekly liquidity has been quite stable.
One keeps hearing that "we're in uncharted territory." That's often an exaggeration, but in this case I believe apt. These are new disclosure and enforcement regulations. Combined with the precipitous drop in security prices, we are at a place we have not seen before.
Comments
Best regards- OJ
Mona
Fill a MMF with bonds like this, and 4.05% will seem low!
MTA bonds I believe are A or AA rated. They could have taken a nosedive because the New York MTA is projecting massive deficits ($6.5B) by year end, due to drop in ridership. It is cutting service service by 25%.
https://patch.com/new-york/new-york-city/mta-loses-125m-week-amid-coronavirus-outbreak-chairman-says
Indicating a flight to quality, VMFXX has a much lower yield than VMMXX (prime), which is now at 1.29%. That at least seems sane.
I don't know if or how the regulations have changed since then that might prohibit Vanguard from supporting its funds.
Thanks- OJ
https://investor.vanguard.com/mutual-funds/profile/portfolio/vmsxx
https://www.schwabfunds.com/public/csim/home/products/mutual_funds/current_nav.html?symbol=SWKXX
With respect to the SWKXX NAV, Schwab only shows the $1 share price, and not the actual internal accounting value that msf found.
FINALLY I noticed that the script blocker on this computer's browser (a Firefox-based variant optimized for these old Apple G5's) was indicating that some resource had been blocked. When I overrode that the section with the NAV info appeared as if by magic. I'll certainly keep an eye on that info.
We actually have a couple of mac Mini's which are much faster and able to handle browsing with no problems, but I generally use the old G5 because it can handle the ancient (Apple OS 9) financial SS which I've been using for some 20 years. It has certain macro functionality which can't be replicated in current spreadsheets, and the financial SS uses a fair number of those automated macro computing routines. All I have to do is copy the daily M* portfolio report, paste it into the SS, push a couple of buttons, and it's all done... everything computed and updated, with graphs showing complete results quarter-by-quarter, and a page showing each fund's performance, both since the previous entry session and YTD.
The SS is certainly dated- Apple had this SS when MS was still using DOS. Old, but good. Like my wife.
Mona
Have a good weekend, Derf
The spreadsheet deals not only with the input data from M*, but also covers each and every source of financial data- bank accounts, CD's, MMKT funds, the estimated value of our weekend place, etc. Basically, all assets other than the value of our home in SF, the value of which isn't covered since we need that to live in.
Sometimes, like now that we're stuck here at home, I input the M* data daily. Other times it's weekly or maybe just when I feel like it.
Weekend? We've totally lost track of that because each day we're confined to the house is very much like every other day. Please be careful and stay healthy!
OJ