Analyst calls rate cuts a foe to money funds

Dec 10, 2008 @ 2:10 pm

By Sue Asci

Money market mutual funds that invest in Treasuries could cost investors money if the Federal Reserve Bank cuts interest rates further, according to Peter Crane, president of the Westborough, Mass.-based research firm Crane Data LLC.

Yields for Treasuries are already less than half a percent and “if the Fed cuts rates again, you will see [more] firms’ giving waivers on fees … to avoid a negative yield,” he said.

“Negative yield is not akin to ‘breaking the buck.’ It just means that you are charging more expenses than you are taking in. The investor is paying a fee that is larger than what you are earning. Most firms would waive the fees to avoid paying a negative yield.”

The money market mutual fund sector was hard hit in September when The Primary Fund, offered by The Reserve Management Co. Inc. of New York, fell below a $1 net asset value and broke the buck.

The event sparked a run on money market funds industrywide.

Following the introduction of a federal guarantee program, the top 20 fund firms that offer money market mutual funds have signed up to participate, Mr. Crane said.

Money fund assets have risen for 10 straight weeks and now total $3.74 trillion, which is 4.5% higher than what they were prior to the Primary Fund’s breaking the buck, Mr. Crane reported.

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