You may have moved to the sidelines with cash to avoid the current market train wreck. If so, that was a good idea. But, how safe is your cash?
If the money market fund owns paper from failing companies, it could result in “breaking the buck”. That would mean a capital loss for you.
If your have money in a safe harbor, that harbor should actually be safe. The only truly safe harbor for short-term cash holdings is a 100% Treasuries money market fund.
We called for investors to switch money market assets to Treasuries-only money funds in August 2007 and again in July 2008. Today the call is even more relevant and more urgent.
Two money funds “broke a buck” in the last few days, one available to the public and one used by local governments to invest their cash reserves. More may be coming. Here is what Bloomberg reported:
Sept. 17 (Bloomberg) — Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.
“This is going to unsettle investors and probably create further runs on other money funds,” Geoff Bobroff, a mutual- fund consultant in East Greenwich, Rhode Island, said in an interview.
The $260 million Colorado Diversified Trust has also fallen below $1 a share because of losses on New York-based Lehman’s debt, according to the S&P statement. The fund pools investments for state and local governments and schools, according to its Web site. All assets, excluding Lehman commercial paper, are set to be transferred today to the Colorado Local Government Liquid Asset Trust, S&P said.
This crisis will end, but until it does, you should not reach for money market yield. You should reach for cold comfort about capital preservation.
If Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and AIG can go insolvent, so can and probably will go many others.
Switch your money market assets to a Treasuries-only money fund. Two examples are Schwab’s SWUXX and Vanguard’s VUSXX. Fidelity has a Treasuries money market (FDLXX), but it is only required to by 80% Treasuries.
When the current credit meldown is well past, you can switch back to a higher yielding money fund, but today the name of the game is risk management, not pursuit of yield.
On a credit and default risk related matter, see our recent article about ETN counter party risk.
Richard Shaw
QVM Group LLC