Money Funds Once Again Take on Higher Risk

After retreating from higher-risk instruments over the past year following the blow-up of the Reserve Funds’ Primary Fund, money market funds are again turning to longer-term, higher-yield instruments. With yields near zero and a lack of high-quality short-term securities on the market, money fund managers are willing, once again, to assume more risk.

As Peter Crane, president of Crane Data, told The Wall Street Journal, “The pendulum has never swung so quickly from greed to fear and back again.” The current asset weighted average maturity of the securities money funds now hold is 52 days, a high not seen since 2006. Last fall, the average maturity fell to 43 days.

David Sylvester, a money market portfolio manager at Wells Capital Management, said easier credit has made it easier for issuers to get longer-term financing, and they has helped institutional investors to forget about the near calamity that all but entirely froze the credit markets last year. As Sylvester put it, “When that happens, and when you don’t have some calamity right at hand, memories tend to fade.”