Bloomberg reinforces that interest rates are controlled by global banks, not the US Federal reserve discount window
Money Market funds have been in a bind since the 2008 panic. When Lehman failed, money market mutual funds were holding paper from the bankrupt Lehman, but had an obligation to not “break the buck” and pass along the losses. Doing so would create a panic among people who believed money market mutual funds are a riskfree place to park money. Unlike the similarly named money market funds at your bank, money market mutual funds are not insured. SIPC insurance only guaranteed the number of shares, not that the price would stay at $1.00
Recognizing the problem, the elves within the Bush Administration retroactively insured the money market mutual funds. The tradeoff was those funds would have to start paying for insurance from their earnings. With overnight interest rates approaching 0% 8 years later, it became impossible to create a net positive interest rate by investing only in treasury securities. The 5 year industry average for money market funds has yielded $0.00%
So the funds resumed taking risks like investing in AAA Commercial Paper, putting them right back in the same position that caused the problem in the first place.
These funds will be split into three types
– retail funds for individuals that invest in things other than government securities will have provisions blocking withdrawals or charging fees if you want your money back during a liquidity crisis
– government only funds that don’t have the safeguards against sudden withdrawals
– institutional funds where the price is not guaranteed to stay at $1.00
It’s entirely possible that the government only funds will pay nothing, or even charge you to hold the money. According to the Bloomberg story, mutual funds are bailing on holding Commercial Paper as they expect a large portion of their $2.7 billion portfolio to evaporate when the 99% of people who are not paying attention learn about the changes.
With these funds no longer investing in Commercial paper, entities that borrow that way are seeing the costs go up as the commercial paper supply dries up, creating a larger difference between government paper and Commercial paper. Bloomberg says that explains why LIBOR has been going up all year, as banks go to each other for liquidity rather than selling commercial paper.
Some brokers have an alternative where excess funds in the brokerage account are deposited overnight in FDIC insured bank account, and brought back to the brokerage account only when you draw down the funds, but earn negligible interest.