March 19, 2020
By Peter Eavis
Just before midnight Wednesday, the Federal Reserve announced that it was offering emergency loans to help money market mutual funds, its latest effort to shore up the financial system.
Money market funds make up a $4 trillion industry and are an important source of financing for corporations. They are generally considered safer than other types of debt investments but were a big problem during the 2008 financial crisis. And now, the coronavirus-related panic engulfing the markets has walloped one type of money market fund again.
What are money market mutual funds?
They are mutual funds run by big asset managers such as BlackRock that invest in short-term debt issued by the federal government, other government agencies, and companies. Individuals and institutions invest in them with the expectation that they will get all their money back and a return that is usually slightly better than bank accounts. Some money market funds invest primarily in government securities, while others, so-called prime funds, hold mostly a type of short-term debt issued by companies called commercial paper. The government funds have $3 trillion in assets, and the prime funds have $1 trillion, according to Crane Data, a research firm that tracks money market funds.
Why have they become a problem?
Investors are flocking to the funds that hold mostly government securities but they have been pulling money out of prime funds to invest in safer assets, like cash. Assets in institutional prime money market funds — in which businesses park their money — have declined by $80 billion, or 12 percent, since March 4, analysts at Barclays wrote Thursday.