Saturday's Wall Street Journal featured an article titled, "Time to Leave Your Money Market Fund", which says, "Short-term savings yields won't make anyone rich these days. But investors can pick up some extra cash -- and get a little added safety -- by switching from money-market funds offered by investment companies to money-market accounts held at banks. There are some trade-offs, however, and the maneuver won't make sense for everyone. "Money market" can refer to two entirely different financial products. One is a mutual fund that invests in safe, short-term securities and passes the income along to investors. The other is a bank account where the rate is set by the lender. Both offer safety and easy access. The average money-market fund yields just 0.06% as of Wednesday, according to Peter Crane, president of Crane Data, which tracks the funds."
The Journal piece, by Jack Hough, continues, "Why is the difference between money funds and money-market accounts so vast? New restrictions on what money funds can buy have "put managers in a smaller box and made yields more similar," says Deborah Cunningham, chief investment officer at Federated Funds, one of the largest money-fund companies. A big money fund called Reserve Primary "broke the buck" after the 2008 collapse of Lehman Brothers, meaning its share price slipped below the $1 a share that such funds seek to maintain. A judge ordered the fund to liquidate and investors got back about 99% of their money."
It explains, "Such losses have been rare, and new rules that took effect in 2010 have made money funds as safe as they have ever been, say Peter Rizzo, director of the fund research group at Standard & Poor's, and Roger Merritt, head of the fund group at Fitch Ratings. The Securities and Exchange Commission announced a plan this week that could make funds even safer, but fund-industry executives say it could squeeze yields even more."
The Journal adds, "Bank money-market accounts have some big advantages. While money funds pay a market rate based on securities yields, banks can pay "artificial rates based on funding needs and competitive factors," says Robert Deutsch, managing director at JP Morgan Asset Management, the largest U.S. money-fund manager. In the past, some banks have offered significantly higher yields because they were in trouble and needed to attract deposits."
This week's Barron's also writes "Regulation Worries Roil Money-Market Industry". It says, "As we explained in our Jan. 9 cover story, "Broken Forever?" the Securities and Exchange Commission has floated some fairly significant -- and, to most in the industry, highly alarming -- proposals for money-fund regulation. On the table, in brief: Ditching the steady $1-per-share convention in favor of a floating net asset value, mandating a capital reserve for each fund, and creating a "hold-back" that would mean you'd have to wait 30 days to receive a portion of your withdrawal."
This article adds, "The SEC hasn't announced anything publicly, but in informal talks with the Investment Company Institute and others, the agency has indicated that its timeline for releasing these new rules has moved up from "sometime in the first half of the year" to "could be March." This, of course, could change again. But the behind-the-scenes discussions we reported on a month ago are now much more public."
