The Fabulous Yields, and Lurking Risks, of Money Market Funds (2023)


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The funds are paying enticing interest rates right now. But the debt ceiling and signs of weakness in the banking system are worrisome, our columnist says.

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The Fabulous Yields, and Lurking Risks, of Money Market Funds (1)
(Video) [Latest]The Fabulous Yields, and Lurking Risks, of Money Market Funds

By Jeff Sommer

Jeff Sommer is the author of Strategies, a weekly column on markets, finance and the economy.

The markets have been rocky ever since the Federal Reserve started raising interest rates to combat inflation last year.

Stocks and bonds have lost money. The costs of financing a car, a house or even a small credit-card purchase have risen. Two important regional U.S. banks failed and needed bailouts, and worries about a possible recession have spread.

But it’s been a glorious time for one part of the financial world: money market mutual funds. The biggest money funds tracked by Crane Data are paying more than 4.6 percent interest, and a handful have yields around 5 percent.

Their gaudy interest rates closely follow the Fed funds rate, set by the central bank. The effective Fed funds rate is now about 4.83 percent. That’s onerous for people who need to borrow money, and deliberately so: The Fed is raising rates because it is trying to squelch inflation by slowing the economy.

What’s painful for borrowers is great for people who need a place to park money they have put aside to pay the bills. In a bid to hold onto customers, some banks have begun raising rates in savings accounts and for certificates of deposit, though most bank deposits remain in accounts that pay close to nothing.

That’s given money market funds magnetic appeal. Their assets have swollen to more than $5.6 trillion, from $5.2 trillion in December 2021, when the Fed began talking about impending interest rate increases. Money market funds are likely to keep growing if the Fed holds rates at their current level, or raises them further.

I’ve used money market funds on and off for decades with no problems, and consider them to be fairly — though not entirely — safe. I think it’s reasonable to put some of your cash in them, as long as you are careful and keep your eyes wide open.

The Landscape Shifts

In June, when money market rates jumped from the near-zero level at which they had languished to as much as 0.7 percent, I pointed out that for the first time in ages, it made sense to start shopping around for places to park your cash.

The days of being consigned to receiving nothing for the privilege of keeping your money in a financial institution were over, if you were willing to make a move. When interest rates started to rise, money market rates started levitating immediately, opening up a wide gap with bank deposit rates.

(Video) Are Money Market Funds Riskier Than You Think?

By now, that gap has widened to its greatest level in decades. The advantages of money market funds are increasingly obvious, not just for the corporate financial officers who have always used them as an efficient and high-yielding place to hold money, but for thousands of ordinary people, who are at last receiving something for their cash.

Say you’ve got $10,000 to stash somewhere. Keep it in a checking account, and you will receive nothing, or close to it. Keep it in a money-market fund paying 5 percent for a year and you will receive $500.

That won’t make you rich. Depending on consumer prices, you could lose purchasing power in inflation-adjusted terms. Right now, money market yields are just beginning to approach the annual rate of the Consumer Price Index, which was 5 percent in March. But compared with nothing, $500 is wonderful.

Some banks are beginning to offer competitive rates with insurance from the Federal Deposit Insurance Corporation — Apple, for example, has partnered with Goldman Sachs, and is marketing a 4.15 percent interest account. Many other financial institutions are competing for attention, too, but they generally lag money market rates.

In short, if you are a money-market fund investor, rising interest rates can be delightful. But in finance, a benefit is rarely without cost.

Known Vulnerabilities

Investors have never had major losses in money market funds in the United States, and I find that record comforting.

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But it doesn’t mean that the funds are without risk.

For one thing, there are already indications that their growing popularity comes partly at the expense of banks, especially smaller ones that have lost deposits. Such losses — which contributed to the collapses of Silicon Valley Bank and Signature Bank last month — have created stress in the entire financial system.

More than $560 billion in deposits exited the commercial banking system this year through April 5, according to government figures. At the same time, more than $442 billion flowed into money market funds, according to Crane Data. That’s been great for the income of the fund investors, but it’s not an unalloyed good for financial institutions.

You can see this in individual companies. At Charles Schwab, for example, which has just reported its quarterly earnings, the firm’s banking arm lost $41 billion in deposits in the first three months of the year. At the same time, Schwab’s money market funds gained $80 billion.

For Schwab customers, the shift has been a tremendous boon. It means a big surge in income for them. For the company’s shareholders, though, it means a crimp in profits. As a company, Schwab says, it is strong enough to handle the shift. That may be so, but not all financial institutions are in solid shape right now.

Financial regulators are monitoring these issues closely.

Money Market ‘Runs’

It’s not just banks that are vulnerable to “runs” — panics, in which people scramble to withdraw their money, spurring others to do the same, in a vicious cycle.Money market funds are periodically subject to runs, too.

There have been only two known incidents in which money market funds were unable to pay 100 cents on each dollar invested in them — they “broke the buck,” in Wall Street jargon — and, despite headaches and long payment delays, no significant losses occurred in those cases.

But there have been many near misses. A 2012 report by the Federal Reserve Bank of Boston found more than 200 instances in which companies that ran money market funds quietly poured money into them to ensure that the funds could pay investors 100 percent of the money they expected.

Recall that the Fed had to restore calm during money market runs in 2008 and again in 2020, during a brief crisis at the start of the coronavirus pandemic. The Securities and Exchange Commission, which regulates money market funds, has already tightened its rules twice, and it is proposing additional changes.

Federal involvement in the money markets has become a constant thing. Since the 2020 crisis, money market funds have increasingly relied on a Fed backstop — the reverse repurchase agreement operations, or “reverse repo,” of the Federal Reserve Bank of New York. Most of the holdings of many money market funds are Treasury securities sold overnight by the Fed. In total, more than $2.2 trillion in securities are tied up in this market.

On March 30, in the midst of the latest banking crisis, Treasury Secretary Janet L. Yellen targeted money market funds as an area of special concern. “If there is any place where the vulnerabilities of the system to runs and fire sales have been clear-cut, it is money market funds,” she said. “These funds are widely used by retail and institutional investors for cash management; they provide a close substitute for bank deposits.”

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While noting the regulatory tightening that had already occurred, Ms. Yellen said that much more needed to be done. “The financial stability risks posed by money market and open-end funds have not been sufficiently addressed,” she said.

How to Use Them

These days, I have a variety of places to stash the cash I’ll need to pay the bills.

These include accounts at a major global commercial bank, a credit union, an online high yield F.D.I.C.-insured savings bank and a low-fee money-market fund with a large, reputable asset management company. Over the past year or two, I’ve kept some money in all of these, though the money market fund has become my favorite lately, because it generates steady cash.

But when the Fed drives interest rates back down — that could happen soon if there’s a recession, or many months from now, if inflation is persistent — money-market fund rates will drop, too, and I’ll reduce my holdings in them.

I’m also aware of the potential perils associated with money market funds. To minimize risk, I use a so-called government fund — one that holds only Treasury bills, other securities of the U.S. government and of U.S. agencies, and reverse repo securities at the Fed. That eliminates the possibility that my fund will hold securities issued by a private company that goes belly up — as Lehman Brothers did in 2008, causing trouble for some money market funds.

Of course, Treasury bills aren’t 100 percent safe either, not with the federal debt ceiling looming. Mind-boggling as this may be, it is possible that the U.S. government could default on its debt. Many money market funds are avoiding Treasury bills that could come due during a debt ceiling stalemate.

Ultimately, I expect reason to prevail and the U.S. government to pay all its bills. Should it default on Treasury obligations, after all, no other financial security in the United States would be entirely safe.

Still, for the money I really need, I’ll be sure to have a higher proportion of my cash in F.D.I.C.-insured accounts when the climax of the debt ceiling fight seems to be upon us, possibly as soon as June.

That’s why, even when it comes to safe places to keep your cash, the general rules of investing apply: Diversify your holdings, and try to understand how much risk you are taking with your money.

I worry about money market funds. They aren’t 100 percent safe. But I’m grateful to have them.


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What are the risks of a money market fund? ›

Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.

What is the yield on money market funds? ›

Money market accounts and instruments typically yield between 0.01% and 4%.

Are Schwab money market funds safe? ›

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

What is one advantage and one disadvantage of a money market mutual fund as compared to a savings account? ›

Key Takeaways. Money market investing can be very advantageous, especially if you need a short-term, relatively safe place to park cash. Some disadvantages are low returns, a loss of purchasing power, and that some money market investments are not FDIC insured.

Are money market funds high or low risk? ›

Both money market accounts and money market funds are relatively safe. Banks use money from MMAs to invest in stable, short-term, low-risk securities that are very liquid. Money market funds invest in relatively safe vehicles that mature in a short period of time, usually within 13 months.

Are money market funds low risk? ›

The primary purpose of a money market fund is to provide investors with a safe avenue for investing in secure and highly liquid, cash-equivalent, debt-based assets using smaller investment amounts. In the realm of mutual-fund-like investments, money market funds are characterized as low-risk, low-return investments.

What affects money market yields? ›

Money Market Fund Rates

Returns from these instruments are dependent on the applicable market interest rates, and therefore the overall returns from money market funds are also dependent on interest rates. So, the lower the rate set by the Fed, the lower the rate a money market fund pays to its investors.

What does 7 day yield mean in money market fund? ›

The 7-Day Yield is the average income return over the previous seven days, assuming the rate stays the same for one year. It is the Fund's total income net of expenses, divided by the total number of outstanding shares and includes any applicable waiver or reimbursement.

What is the difference between yield and return in money market fund? ›

Yield is the amount an investment earns during a time period, usually reflected as a percentage. Return is how much an investment earns or loses over time, reflected as the difference in the holding's dollar value. The yield is forward-looking and the return is backward-looking.

What is the safest type of money market fund? ›

Prime money market funds.

U.S. government money market funds are typically regarded as the safest of the three, and within that category, those with a high concentration of Treasuries—with full government backing—would be exposed to a lower likelihood of default risk.

Is Fidelity or Schwab better? ›

Schwab and Fidelity offer similar customer experiences. As a result, most types of investors can find benefits to working with either. The choice between the two may prove a matter of preferred trading instruments: Schwab is better equipped for futures (and international) trading, and only Fidelity offers forex.

What are two disadvantages of a money market fund? ›

Disadvantages of a Money Market Account
  • Returns May Be Lower Than Other Investments. Investing is all about netting potential returns. ...
  • Your Financial Institution May Limit Convenient Withdrawals. ...
  • There May Be Minimum Balance Requirements.
Mar 18, 2023

Is a money market fund better than a savings account? ›

Money market accounts pay a slightly higher interest rate than traditional savings accounts because banks invest in short-term, highly liquid, low-risk assets with the funds. Many money market accounts come with minimum balance requirements.

Which is better a money market or savings account? ›

If you don't have a lot of money to start with, a savings account makes sense because it's possible to find accounts that don't require minimums. If you want to earn a higher APY and you can meet a higher account minimum, a money market account is a good choice.

Which is better money market or mutual fund? ›

If you ask for easy access to your money and want the safety of FDIC insurance, a money market account may be the better option. However, a mutual fund may be the way to go if you want higher potential returns.

Which funds are most risky? ›

High-risk investments include currency trading, REITs, and initial public offerings (IPOs). There are other forms of high-risk investments such as venture capital investments and investing in cryptocurrency market.

Is money market safer than savings? ›

Which is safer: a savings account or money market account? Money market accounts and savings accounts are equally safe places for consumers to keep their savings. However, it's important to open accounts at banks that are covered by FDIC insurance. You can check if your bank is FDIC-insured here.

What are the benefits of a money market account? ›

4 benefits of a money market account
  • It may be insured and secured. Unlike money invested in stocks and bonds or other investment vehicles, the funds in a money market account carry lower risk. ...
  • It comes with familiar account benefits. ...
  • It is usually easy to access. ...
  • It could return superior interest rates.
Nov 14, 2022

Which funds are lowest in risk? ›

Debt funds are low risk mutual funds that invest in money market instruments, government bonds, etc. As a result, the risk associated with these instruments is lower. There are multiple schemes under the debt funds category. Some of which are liquid funds, dynamic bond funds, gilt funds, ultra-short-term funds, etc.

Why is money market less risky than capital market? ›

Because they involve lower volatility and are issued for a shorter period, Money Market securities are less risky than Capital Market securities. Money Markets are highly liquid compared to Capital Markets. The money market helps meet the companies' short-term credit requirements, such as working capital.

What are examples of money market funds? ›

Types of money market funds

Investments can include short-term U.S. Treasury securities, federal agency notes, Eurodollar deposits, repurchase agreements, certificates of deposit, corporate commercial paper, and obligations of states, cities, or other types of municipal agencies—depending on the focus of the fund.

How money market funds work? ›

Money market funds invest in high quality, short-term debt securities and pay dividends that generally reflect short-term interest rates. Many investors use money market funds to store cash or as an alternative to investing in the stock market.

Why do prices go down when yields go up? ›

Rising bond prices work against existing bondholders because of the inverse relationship between bond yields and bond prices. When yields rise, prices of current bond issues fall. This is a function of supply and demand.

What is the money market yield over time? ›

US Money Market Treasury Yield is at 4.83%, compared to 4.57% last month and 0.33% last year. This is higher than the long term average of 1.55%.

What is yield to worst for a fund? ›

Yield to worst is a measure of the lowest possible yield that can be received on a bond with an early retirement provision. Yield to worst is often the same as yield to call. Yield to worst must always be less than yield to maturity because it represents a return for a shortened investment period.

How often do money market funds pay? ›

As customers deposit funds in a money market account, they earn interest on those funds. Typically, interest on money market accounts is compounded daily and paid monthly.

How often do money market funds pay dividends? ›

Distributions: Schwab Money Funds pay dividends on the 15th of each month (or on the next business day, if the 15th is not a business day), except that in December dividends are paid on the last business day of the month.

Which is better yield or return? ›

If you only care about identifying which stocks have performed better over a period of time, the total return is more important than the dividend yield. If you are relying on your investments to provide consistent income, the dividend yield is more important.

What is the benefit of yield return? ›

For example, yield return is a . NET sugar to return an IEnumerable with the only needed items. The advantage of using yield is that if the function consuming your data simply needs the first item of the collection, the rest of the items won't be created so it's more efficient.

What are best money market rates? ›

Current rates for our top 10 money market accounts*
  • Vio Bank: 4.88%
  • Ally Bank: 4.15%
  • Redneck Bank: 5.05%
  • Prime Alliance Bank: 4.50%
  • UFB Direct: 4.81%
  • TIAA Bank: 4.25%
  • Sallie Mae Bank: 4.15%
  • Zynlo Bank: 4.30%

Should I take my money out of the bank 2023? ›

Despite the recent uncertainty, experts don't recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured. "It's not a time to pull your money out of the bank," Silver said.

Where is the safest place to put your money right now? ›

What are the safest types of investments? U.S. Treasury securities, money market mutual funds and high-yield savings accounts are considered by most experts to be the safest types of investments available.

How do you guarantee 10 percent return on investment? ›

Where can I get 10 percent return on investment?
  1. Invest in stock for the long haul. ...
  2. Invest in stocks for the short term. ...
  3. Real estate. ...
  4. Investing in fine art. ...
  5. Starting your own business. ...
  6. Investing in wine. ...
  7. Peer-to-peer lending. ...
  8. Invest in REITs.

Is Vanguard better than Fidelity? ›

Fidelity: 2023 Comparison. Vanguard and Fidelity are both retirement powerhouses, but Fidelity offers a more well-rounded platform that also caters to active traders. Arielle O'Shea leads the investing and taxes team at NerdWallet.

Why choose Vanguard over Schwab? ›

Bottom line: Vanguard and Charles Schwab both offer multiple low-cost IRAs, but Vanguard is the better option for investors in search of the best retirement funds. Schwab, however, is more ideal for those who want access to more IRA account types and lower automated investing fees.

Are Vanguard funds better than Schwab? ›

Is Charles Schwab better than Vanguard? After testing 17 of the best online brokers over three months, Charles Schwab (94.51%) is better than Vanguard (71.94%).

Why is my money market account losing money? ›

While money market accounts typically offer higher interest rates than traditional savings accounts, those may not be high enough to keep up with inflation. This means that the purchasing power of your money will decline over time, even if the account balance remains the same.

Is it wise to invest in money market funds? ›

Is a money market fund a good investment? While money market fund yields are rising as they benefit from the Federal Reserve raising interest rates, money market fund investments aren't ideal for long-term investing, as the returns tend to be much lower than stocks and bonds.

Is Fidelity money market fund safe? ›

Stability & safety

While not insured by the FDIC, the funds are required by federal regulations to invest in short-maturity, low-risk investments, making them less prone to market fluctuations than many other types of investments.

How high will money market rates go in 2023? ›

The national average rate for savings accounts will be 0.29 percent by the end of 2023, McBride forecasts, while predicting an average of 0.34 percent for money market accounts.

What is the highest yielding MMF fund? ›

7 Best Money Market Funds for 2023
Money Market FundExpense Ratio7-Day SEC Yield
Vanguard Treasury Money Market Fund (VUSXX)0.09%5%
Schwab Value Advantage Money Fund Investor Shares (SWVXX)0.34%4.9%
Fidelity Money Market Fund (SPRXX)0.42%4.8%
Fidelity Government Money Market Fund (SPAXX)0.42%4.8%
3 more rows
2 days ago

Who typically uses money market accounts? ›

For the most part, money markets provide those with funds—banks, money managers, and retail investors—a means for safe, liquid, short-term investments, and they offer borrowers—banks, broker-dealers, hedge funds, and nonfinancial corporations—access to low-cost funds.

Do you pay taxes on money market accounts? ›

Be aware, though, that any interest earned on a traditional or high-yield savings account—as well as certificates of deposit and money market accounts—is considered taxable income by the IRS.

What is better than a money market? ›

CD rates are typically higher than money market account rates. Banks have an incentive to give you better rates for CDs because you promise to give up access to your money until the end of the CD term. What's the difference between a CD and a mutual fund? Which is safer: CDs or MMAs?

Are money market accounts good for retirement? ›

Retirement money market accounts are money market accounts held in a retirement account such as a 401(k) or an individual retirement account, or IRA. These accounts pay low interest, but provide liquidity and stability. Retirees can use retirement MMAs to write checks and make withdrawals as needed.

What are the risks of money market funds? ›

Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.

What are the pros and cons of a money market fund? ›

Money market accounts are savings accounts that often offer higher interest rates than regular savings accounts and often incorporate checking account features, like easy access to cash. Yet they can also have downsides: Many have minimum balance requirements and excessive fees.

What is the difference between money market and money fund? ›

Money market accounts and money market funds may have similar names, but they have some key differences. A money market fund is a low-risk and highly liquid investment asset — specifically, a mutual fund — while a money market account is a type of interest-bearing account offered by a bank or credit union.

Is money market safer than mutual funds? ›

Risk. Both money market accounts and money market mutual funds are considered low-risk investment options. Of the two, the money market account is the lower risk, because it is simply a savings account with a high interest rate.

Are money market funds aggressive? ›

A money market fund is essentially a type of mutual fund that holds other securities, such as U.S. Treasurys and corporate bonds. The nature of these securities is usually short-term and the focus is conservative growth, rather than aggressive growth.

How much money should you keep in a money market account? ›

Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.

What are the pros and cons of money market funds? ›

Money market accounts are savings accounts that often offer higher interest rates than regular savings accounts and often incorporate checking account features, like easy access to cash. Yet they can also have downsides: Many have minimum balance requirements and excessive fees.

How much money is safe in a money market account? ›

Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners.

Why is money market better than savings? ›

Some people choose money market accounts over savings accounts because they offer higher interest rates. While the difference in earned interest can be small, it might be enough to offset possible liquidity constraints posed by money market accounts, if you're are unlikely to need quick access to your cash.

Is a money market a good choice? ›

If you want to earn a higher APY and you can meet a higher account minimum, a money market account is a good choice. It's also a smart option if you need easy access to your money.

Is money market safer than bonds? ›

Money markets are extremely low-risk, with a par value of $1.00 typically. Meanwhile, short-term bonds carry a greater degree of risk depending on the issuer, which may be a company, government, or agency.

Are money markets better than mutual funds? ›

If you ask for easy access to your money and want the safety of FDIC insurance, a money market account may be the better option. However, a mutual fund may be the way to go if you want higher potential returns.

Should I put all my money in a money market fund? ›

If you're saving for something you'll need the money for in less than three to five years, saving in a money market fund may make sense for you. Money market funds are ideal for short-term saving because they invest in highly liquid securities with the objective of capital preservation and income.

How long do you keep money in a money market? ›

No, money market accounts do not have time limits or terms. You can deposit or withdraw money from the account at any time, though there may be limits on how many withdrawals or transfers you can make in a single statement period.


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