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Moody’s on $1 money market funds

By Sheyna Steiner ·
Wednesday, August 11, 2010
Posted: 1 pm ET

A new report from Moody's has found that back in 2008, "breaking the buck" was a problem for substantially more than one money market fund. In fact, many money market funds struggled at that time.

In September 2008, the net asset value of Reserve Primary Fund fell below $1 per share. According to the Financial Times blog, Alphaville, the new report from Moody's found that 62 money market funds worldwide, 36 in the U.S., were in danger of share prices dropping below $1 at that time and through 2009.

The reason only one fund actually broke through the $1 threshold is because the sponsor companies of the troubled money market funds propped them up.

That's upsetting news if you keep a reserve of cash in a brokerage account money market fund. You could end up losing money. That risk has always been there but it happens very rarely.

Unfortunately, it may not be as rare in the future.

As the Financial Times blog notes, the Moody's report concluded that struggling money market funds may not have the financial support of their sponsors now and in the future because of low interest rates, decreasing revenues and the size of the funds, among other variables.

Subsequent to the 2008 breakdown of Reserve Primary Fund, the SEC released new rules for money market funds, dictating that funds keep a larger portion of assets in liquid securities and restricting their investments in second-tier investments.

In 2008, Laura Bruce reported on Reserve Primary Fund for Bankrate and had these suggestions for investors worried about the stability of their money market funds:

  • Don't base money market fund selection solely on yield or convenience.
  • Read the prospectus.
  • Understand the investments in the fund.
  • Know that money market funds are not insured by the FDIC.

Unlike money market accounts, money market funds are not insured by the FDIC. To learn more about money market funds, read this Bankrate story.

Just in case you were unaware, you can use Bankrate's rate tables to search for money market accounts across the country.

Have you ever been concerned about your money market fund "breaking the buck"?

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