Sept. 11, 2003 — Money market funds, regarded as one of the safest and most liquid of investments, are swooning in this low interest-rate environment.
The average government money market fund rose a scant 0.45% year to date through August, little more than the average municipal money market fund (0.37%), and the average taxable money market portfolio (0.43%), according to Standard & Poor’s data.
Indeed, the average seven-day simple yield on taxable money market funds, which approximately tracks the Federal Reserve’s federal funds rate, plunged to 0.50% a few weeks back — a 45-year record low.
Yields on money market funds, which translate into performance, are low right now because short-term interest rates are at historically low levels. Money market funds typically invest in very short-term bank, corporate and government debt securities. As a result, long-term interest rates have minimal impact on money market funds.
Indeed, the Federal Reserve’s Open Market Committee (FOMC) is widely expected to keep short-term interest rates low for an extended period, dashing any hopes for money market rates to rebound any time soon.
“The consensus from the portfolio managers that we speak to is that the Fed will hold rates steady through the end of this year, and likely for the beginning of 2004,” said Peter Rizzo, director of fund research at Standard & Poor’s. “Money market fund returns are highly correlated to short-term rates. For instance, when the Fed Fund rate is 5%, money market fund returns would likely be in that neighborhood.”