The difference in yield between Treasury money market funds and Prime money market funds has never been greater. Prime funds yielded on average from 0.15% to 0.50% more than Treasury funds during the year prior to August 2007, when the spread blew out to 0.81% in August. In September, the spread broke 1.00%, then came back in for October, before moving out to over 1.50% in December and January.

The spread came back in for February, but has since broken 2.0% on Crane Data's Money Fund Intelligence Daily index series. Treasury Institutional money funds yielded (1-day) 1.03% yesterday vs. 3.19% for Prime Institutional, while Treasury Individual money funds yielded 0.69% (net) vs. 2.83% for Prime Institutional. While the spreads aren't as pronounced on the 7-day yields and while they're expected to come back in as new Treasury supply comes online later this week, the price of safety has never been greater.

Crane Data believes that far more money will be lost by investors via lower Treasury yields than ever will be lost any exposure to troubled SIV holdings. Of course, all money market funds are safe and investors have experienced no losses or halts in redemptions to date. But flight-to-safety Treasury investors risk the very real potential of market whiplash and possibly even principal losses for direct buyers. Some funds have closed to new or large "portal" investors due to the ridiculously low yields.

While Treasury bills have no credit risk, their concentration and lack of liquidity make these perhaps even riskier than prime money market funds. Prime funds offer greater liquidity, diversity, and less threat of price movements, the only real threat to a fund's NAV. Treasury funds without repo holdings hold longer WAM (weighted average maturities) and exposure to interest-rate risk. (See the October 2007 issue of Money Fund Intelligence for a recent study showing and argument that Prime funds are safer than Treasury money funds.)

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