Government Support Doing the Trick for Money Market Funds

After a $200 billion run on money market funds in September, the operations of, and flows to, money market funds are beginning to return to normal, the South Florida Sun-Sentinel reports.

For one, interbank lending has begun to resume, making money market funds more comfortable about investing in short-term commercial paper, and less worried about having enough cash on hand to meet excessive redemptions.

For another, 20 major fund firms have supported money market funds that held securities in companies hit by the financial crisis with additional money to keep their net asset values whole. In addition, nearly all of the money market funds available signed up for the U.S. Treasury’s temporary insurance program. On top of this, the government said it would loan more than $1 trillion to banks to buy commercial paper; the government also began buying commercial paper directly from issuers on Oct. 27, and it offered up to $540 billion in financing directly to money market funds.

Thus, after losing $209 billion in the first two weeks after Reserve Funds’ Primary Fund broke the buck, about $120 billion in inflows have return to money market funds.

“It looks as if it’s still a delicate situation, but the money markets in general have been recuperating,” said Peter Crane, president of Crane Data.

“The consumer doesn’t really have much to worry about,” in terms of the value of their money market funds declining, agreed Eric Jacobson, a fixed income analyst with Morningstar. However, Jacobson was quick to add, the money markets have not fully returned to normal functioning. “Are the institutions and normal players willing and able to step up and buy and sell in the normal way they have for years?” he asked.