One of the most frequently asked questions recently is, how to buy money market funds? Money market funds have been a thing that no one cares about for more than a decade, but they have suddenly become popular recently. In fact, the reason is very simple, that is, his rate of return is too high, and there is almost no risk. The current average interest rate of depositing money in banks is only 1%, while in money market funds, there will be 4% to 5% interest at random, and it can be withdrawn and used at will.
Many people are now aware of this interest rate difference and have begun to transfer their deposits. This phenomenon has attracted the attention of major banks. Deposits are the lifeblood of banks. Without deposits, all businesses of banks will shrink. The Federal Reserve is also aware of this, and now the rate of deposit loss has begun to force the Fed's monetary policy.
Since money market funds are closely related to the deposits of each of us, and have begun to cause systemic risks to the entire market, it is necessary for me to talk about this topic for you. What kind of risks will the fire of money market funds bring to the current US stock market? For us ordinary people, are money market funds really risk-free and high-yielding? What should we ordinary people pay attention to when investing in money market funds?
If we want to talk about the sudden fire of money market funds, we have to start with the SVB bankruptcy incident that caused a lot of noise some time ago. I believe that many people have already understood that the most direct reason why SVB could not survive at that time was that the deposits were lost too quickly, which led to insolvency and eventually bankruptcy. So why do deposits drain so quickly? A large part of the reason is because of this money market fund. At that time, the interest rate of money market funds was generally as high as 5%, and like deposits, money market funds could also be withdrawn as needed. On the other hand, SVB has a deposit rate of less than 1%.
We ordinary people are not sensitive to interest rates and various investment tools. But companies are different. They often have professionals to manage their finances, and they know how to maximize their profits. And SVB's customers are almost all enterprise customers. When they saw such a high interest rate spread in the market, it was natural that these deposits were gradually transferred to places with higher yields. And the operation of SVB itself had problems, which accelerated his bankruptcy.
After the bankruptcy of SVB, investors with keen sense of smell have noticed the driving force behind the scenes, the money market fund. In addition, the deposit trust crisis caused by the bankruptcy of SVB, many people began to transfer their deposits. And those who have a keen sense of smell, they realize that transferring money to a big bank is still about 1% interest, so they might as well just follow suit and transfer money directly to money market funds, and they can get more income ,Why not do it? Since the SVB thunderstorm on March 8, a total of 300 billion U.S. dollars has flowed into money market funds, and at the same time, Americans have just lost 300 billion U.S. dollars in deposits. This is certainly not a coincidence.
This trend of deposit loss is still not over. On the contrary, as more and more people realize the interest rate difference, the rate of deposit loss is still accelerating. So how will this affect financial markets? One of the most direct impacts is that it will exacerbate the current liquidity crisis of banks. As long as the interest rate difference between the monetary fund and bank deposits remains, the banks will bleed. There will always be some poorly managed banks like SVB, following in his footsteps.
This is not the most frightening thing. The more frightening effect is that banks will tighten credit because of this, that is, banks will not lend. The most important thing in bank operations is the amount of his deposits. The bank's money-making projects, including his loans and investments, all depend on the size of the deposit. Once deposits are lost too quickly, banks must shrink all their businesses based on the principle of prudent operation and extremely strict supervision.
And this will affect more than just the simple fact that banks make less money. The more critical impact is that he will reduce the currency circulation in the economy, thereby inhibiting the development of the economy. The reason is very simple. Once banks are unwilling to lend money, companies will not be able to get money to operate, and people will not be able to get money to consume. The entire economy would shrink. That is to say, as long as the interest rate difference between the monetary fund and deposits is maintained, deposits will continue to flow out, and the US economy may accelerate into recession.
The most radical way to solve this crisis is for the Fed to cut interest rates . The reason why monetary funds can have such high interest rates today is because of the unprecedented rapid interest rate hikes by the Federal Reserve. And if the Federal Reserve starts to cut interest rates, the yield of money funds will drop immediately, which can stop the bleeding of banks and curb the outflow of deposits. This is why although the Fed says it will not cut interest rates this year, the market expects the Fed to cut interest rates at least three times this year. It is because the market believes that it is impossible for the Federal Reserve to allow this huge interest rate differential to continue.
After talking about the impact of so many money market funds, I believe there must be some judges who bite the bullet. Why don’t you tell me what a money market fund is? In fact, don't look at the influence of money market funds, and the name sounds quite bluffing. In fact, this thing has no technical content, and it is very easy to understand.
A money market fund, first of all, is a fund. Like other funds, it is a portfolio that invests in a basket of products. It's just that his basket is all short-term bonds with the lowest risk and the best liquidity. Among them, the largest investment target is the short-term treasury bonds of the United States, which generally mature within 3 months. This is why the Fed's monetary policy has such a great impact on money market funds. Because the benchmark interest rate adjusted by the Federal Reserve is directly reflected in the short-term treasury bonds of the United States. Now the Fed's benchmark interest rate is around 4.83%, the short-term treasury bond interest rate is basically at this level, and the interest rate of most money market funds is also at this level.
In addition, money market funds will also invest in short-term financial products such as bank acceptances, certificates of deposit, and commercial paper. It doesn't matter if you don't know what these are, you just need to know that these are investment products with extremely short maturity, high liquidity, and extremely low risk. They are very similar to short-term Treasury bills.
So you see, the money market fund is actually such a fund that packs all the highly liquid and low-risk investment products on the market. This thing has no technical content, and the bank's own business manager has always been reluctant to recommend this product to customers. But it is precisely because this thing has no technical content, so there are many organizations that provide this product. In the United States, almost every bank or brokerage has its own money market fund, and the channels for purchasing are also very diverse. In China, there is also a well-known money market fund called Yu'E Bao.
If you really want to invest in money market funds, then there are 3 characteristics you must understand. First, money market funds are capital-guaranteed. This is one of the original intentions of this fund design. Therefore, the assets in it are almost all risk-free investments. The Net Asset Value of money market funds has always been maintained at 1 US dollar, which has never changed for decades, and the investment income will be sent to investors in the form of interest on a regular basis, which is actually very similar to bank fixed deposits. similar.
The second characteristic of money market funds is their high liquidity. Unlike bank fixed deposits, which you need to deposit for a fixed period of time, money market funds can be deposited and withdrawn at any time. And when you need money and need to redeem it, he will be able to hand over the cash to you in no time. Most of the money market funds in the United States are T+0, that is, if you place a transaction order on the same day, the delivery can be completed on the same day, and then you can withdraw cash soon. However, ordinary funds or stocks are still T+2, that is, they need to wait two days to complete the delivery.
The last characteristic is that money market funds have low transaction costs. Now other funds often have some hidden fees, such as entry fees, exit fees, short-term redemption fees, and some transaction commissions. However, because money market funds have little technical content and fierce competition, they almost do not have the above-mentioned fees at all. In fact, this is why the business manager of the bank does not like to recommend this product to you.
It is precisely because of these characteristics that money market funds can be regarded as a substitute for bank deposits. That's why the drain on deposits can be so severe when the difference between interest on money market funds and interest on deposits is so wide. In fact, if you have extra cash, you can buy some money market funds to earn higher interest.
What we just talked about are some advantages of money market funds, but before investing, we must also understand the problems of this investment product.
First of all, we must be clear that money market funds can only be used as a short-term investment product, and she is not suitable for long-term investment. Unlike fixed deposits in banks, fixed deposits guarantee both capital and interest. From the moment you start depositing fixed deposits, the amount of interest charged each month is fixed. Although the money market fund guarantees its principal, it does not guarantee its interest. In the process of holding, if the Fed's benchmark interest rate changes, the interest income of money market funds will also change in real time.
The reason why money market funds are so attractive now is related to the current high interest rates maintained by the Federal Reserve. And this high interest rate is difficult to maintain for a long time, and it will definitely return in the end. That said, your interest income will eventually taper off as well. In fact, in the 1980s, money market funds were once on fire, when the benchmark interest rate was once as high as 20%. But it didn't take long for interest rates to drop to 3%, and money market funds' returns fell sharply. In fact, judging from historical data, money market funds cannot outperform inflation in the long run. Therefore, it is feasible to replace deposits with him in the short term, but he is not qualified as a long-term investment.
Another factor that has to be considered when investing in a money market fund is that it is not covered by FDIC insurance. If you put your money in the bank, assuming the bank fails, then the government agency FDIC will have a $250,000 insurance to cover your loss. However, monetary funds are not covered by insurance. If the issuing bank of the fund you invest in fails, no one will cover you.
You may question, didn’t we just say that monetary funds are guaranteed capital? Why is it at risk again now? Yes, in most cases the money fund is guaranteed, but in extreme cases, he still has the risk of losing money. This happened during the 2008 financial crisis.
Reserve Primary Fund, one of the largest money market funds in the world at that time, experienced a huge crisis, and the company even declared bankruptcy. The cause of the incident was that RRF held a small portion of Lehman Brothers' commercial paper in its position, accounting for about 1.2%. With the bankruptcy of Lehman Brothers, the 1.2% commercial paper has become a permanent loss of RFF.
1.2% doesn't seem like much, but the markets spooked as they realized that money market funds weren't necessarily safe either. RFF not only holds the commercial paper of Lehman Brothers, but also holds the commercial paper of AIG, Bank of America and Citigroup. These financial institutions are also in a state of self-defense. No one knows whether these commercial papers will also have problems. Therefore, after the news was released, investors demanded the redemption of the fund almost at the same time. In just 24 hours, 2/3 of RRF’s assets were applied for redemption, and the run soon occurred.
In response to the run, RRF immediately announced that it would reduce the net asset value from the original $1 to $0.97. This means that the investor has lost 3% of the principal. At the same time, the fund also announced that it will not accept any redemption applications within 7 days. This is all right, the two major advantages of money market funds, capital preservation and high liquidity, are all gone. Investors panicked, and panic quickly spread to other money market funds. All banks are invariably facing the risk of a run.
In the end, it was the government that stepped in to save the crisis. At that time, the U.S. Treasury Department first ordered RRF, the instigator, to immediately cease operations and immediately enter bankruptcy liquidation procedures. A super-large fund with $65 billion collapsed in an instant. In order to appease other investors, the Ministry of Finance introduced a temporary guarantee plan for monetary funds at the same time, guaranteeing the principal of all monetary funds. Of course, investors in RRF are excluded. After the introduction of the policy, the situation of investors gradually calmed down, and the wave of runs stopped soon, and the most serious money market fund crisis in history came to an end.
But it is precisely because of this crisis that the SEC has decided to impose stricter supervision on monetary funds. Among them, the SEC stipulates that 97% of the assets of the money fund can only invest in securities with the two highest credit ratings. The SEC also requires the money fund to increase liquidity. Assets must be convertible into cash within a week. In addition, the SEC will regularly conduct stress tests on monetary funds to ensure that they have the ability to maintain a stable net asset value under various extreme conditions. At present, the possibility of another crisis like that in 2008 is very low for money market funds. But this at least gives us investors a warning, that is, investment is always risky, and our vigilance cannot be relaxed under any circumstances.
Having said so much, I think you should have a certain understanding of money market funds. If you decide to invest, how should you invest? What other factors need attention?
First of all, the rate of return is undoubtedly the most important thing to consider. The most frequently viewed data in the industry is the annualized real rate of return over the past 7 days. The reason why I did not choose the 30 days or one year commonly used by funds is because the yield of money funds fluctuates greatly and varies almost every month. Therefore, only the yield of the last few days has reference value. In addition, the rate of return we see is generally the rate of return after deducting the management fee, so when you choose a fund, you can ignore the management fee and directly compare the actual rate of return.
In addition, the tax incentives for money market funds also require our attention. For example, like Vanguard's municipal money market fund VMSXX, he will provide tax incentives to some Americans. All interest income will be exempt from federal income tax, but local taxes will still be paid. Some funds are also exempt from local tax. If your tax bracket is particularly high, then these funds may be more suitable for you. But be aware that these tax-advantaged money market funds generally have lower yields. Take this VMSXX for example, its income is only 3.87%, which is about 1% lower than that of ordinary money market funds.
It is also important to note that most money market funds in the United States are only available to US residents. If you are not a US resident, you can also look for USD products offered by local brokerages or banks. For example, in my country, Canada, there are some local brokerages that offer USD currency funds with similar yields. You can also choose to invest directly in local currency money market funds, such as China's Yu'e Bao.
Finally, I would like to say that due to compliance reasons, some brokerages may not be able to provide money market funds, or they can only provide money market funds issued by themselves. So if you can't find the target you want to invest in on the brokerage's trading page, you may have to ask your bank or brokerage if there are other trading channels.
Add
