Interest Rate Roundup

Wednesday, November 14, 2007

Money market rumblings

Money market funds -- you know, those "cash like" investments that are as close to risk-free as investments get -- are having some problems.

In a story called "Investor Safe Haven Becomes a Concern," the New York Times reports ...

"In another sign of turmoil in the credit markets, large investment firms, having sought out the high yields for their money market funds, are being forced to protect the funds from losses brought on by investments that no longer seem safe.

"The moves have cost the firms hundreds of millions of dollars, a price that could climb if credit market problems worsen."

Meanwhile, in a Barron's article this afternoon, we're learning of a very short-term bond fund managed by General Electric that's having problems. According to Barron's ...

"A SHORT-TERM INSTITUTIONAL BOND RUN MANAGED by General Electric Asset Management apparently has suffered losses in mortgage and asset-backed securities and is offering investors the option to redeem their holdings at 96 cents on the dollar.

"The setback at GE Asset Management's GEAM Trust Enhanced Cash Trust is the latest in a series of problems encountered by money-market and short-term bond funds from the turmoil in the mortgage and asset-securities markets.

"Legg Mason, Wachovia and Bank of America have had to provide financial support to their money-market funds to prevent their funds from "breaking the buck," or falling below the $1 asset value that money funds seek to preserve.

"The GE fund, totaling $5 billion, is an "enhanced" cash fund, meaning it seeks to provide a slightly higher yield than a money-market fund while preserving principal and maintaining an asset value of $1 per share."

The housing bubble and bust is the most visible consequence of the Fed's dramatic rate-cutting campaign earlier this decade. But lowering the federal funds rate to 1% had another, more subtle, yet just as important, impact on the capital markets -- it ignited a global search for yield.

Pension fund managers, bond fund managers, hedge funds, and other investors could no longer generate reasonable returns on less-risky securities, like U.S. Treasuries. So they plowed into esoteric, higher-yielding bonds, CDOs, CLOs, SIVs, and other vehicles. Now, many of those higher-risk securities are blowing up in investors' faces. And based on some of this reporting, we're getting dangerously close to the point where one or more money funds could break the sacrosanct $1 net asset value.


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