Money Mutual Funds

Why Money Mutual Funds Have Been Tested By Poor Economic Conditions

Money mutual funds, or money market mutual funds, have become an increasingly important part of the financial markets. They exist to provide liquidity into the short term debt securities markets, and for most of their relatively short history they have performed this function well. Only in recent years, with the worsening global economic situation, has the market failed to deliver what was intended. Even now, it appears as though the problem will be short lived, and that there will be long term disruption to this now vital market.

The money market funds which are traded on an open exchange are intended to always trade at $1. There is no potential gain to be made from buying and selling the investment, only from holding it and being paid the dividend. This means that investing in these funds is a low yield, but long term and secure, way of deploying your financial resources, even though the individual investments may be short term. Short term debt securities are traded in this way for the purposes of making the market more liquid, and to ease the buying and selling of commercial loan paper.

This system of everything trading for $1 worked extremely well for several decades, before the economic crisis forced a change. The change occurred because a company which was heavily involved in the market went bankrupt, leaving the paper holder to pay back the debt. The broker selling the fund had to quote a price below the dollar to reflect the lost value of what was being sold. The market has now recovered, and the short term drop in value has never been repeated.

Despite this, the market has never returned to the levels of buoyancy it once knew. Activity on any financial market is sure to remain below average while there is so much uncertainty. This applies even more graphically to the ultra short trading market which is a companion to the main money market fund. This market deals in extremely short term debt securities, and is even more volatile in terms of sentiment. It was suspected that the market failure could start a stampede akin to a run on a bank, but this has not happened.

The potential for money mutual funds to get into deeper trouble within the economic depression is still there, but the poor performances of companies and the defaulting on loans is rarely a surprise at this stage. The market sentiment is bearish, and all bad news appears to already be factored into the price. Based on previous experiences within rough times, it seems unlikely that any major catastrophe will be affecting the money funds market. It is inevitable, though, that there will never again be the same level of confidence shown in money mutual funds.

 

 

 

 

 

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