Money funds on edge after cash outflows resumed

One condition for a thaw in the credit markets this week may be the willingness of money market mutual fund shareholders to stay put.

Cash outflows from the funds had slowed early last week. But on Thursday, another substantial chunk of money left so-called prime funds, which invest mainly in short-term corporate IOUs.

That was particularly troubling for the $3.3-trillion money fund industry because the federal government on Sept. 19 had announced an unprecedented insurance program for fund assets. The goal was to reassure investors and halt an outflow of cash that followed the Reserve Primary Fund's announcement on Sept. 16 that it had lost 3% of its principal value on defaulted Lehman Bros. Holdings Inc. IOUs.

Reserve Primary Fund's loss marked only the second time in 38 years that a money fund had cost shareholders some of their principal.

After that bomb, spooked investors yanked a net $85.4 billion from money funds on Sept. 17 and another $47.6 billion on Sept. 18, according to fund tracker iMoneyNet Inc.

The situation began to calm after the government said it would set up an insurance fund that would be voluntary for fund companies. Last Wednesday, prime funds for institutional investors had their first daily net inflow since the Reserve Primary Fund announcement.

On Thursday, however, the outflows resumed, totaling a net $21.5 billion from prime institutional funds and $2.9 billion from prime retail funds (those used by individual investors), according to iMoneyNet.

Friday data will be reported later day.

Pete Crane, head of fund tracker Crane Data, said the Thursday outflow was disappointing in light of the plan for the federal insurance fund. But he said he was encouraged that no other money fund has reported a principal loss stemming from Lehman Bros. IOUs or other troubled debt.

For investor psychology, "Every day that goes by without another fund 'breaking the buck' is a good day for the money fund business," Crane said.

One other piece of relative good news for the industry: Much of the cash that has fled prime funds may just have shifted to government-only funds, which own IOUs of the Treasury or federal agencies.

While prime institutional funds had a net cash outflow of $295.9 billion from Sept. 15 through Thursday, government-only institutional funds saw assets swell by $227.1 billion in the same period, iMoneyNet data show.

The problem is that investors' rush for the safety of government debt worsens the credit crunch by starving corporate borrowers of short-term cash they need to finance their operations.

Investors also are paying a price to play it safe: The average annualized seven-day yield on government-only retail funds was 1.22% in the week ended Sept. 23, compared with a yield of 1.94% on prime retail funds, according to iMoneyNet.

Comments

[mace.bruce]

It is amazing that the only thing that the 'big wigs' suggested would be that the market would be a little 'subdued' to the purposed market bailout. I was not surprised that the DOW is currently down 300pts this morning. I would expect to see it go lower still. They ban short-sellers, they pump millions of dollars into the market every day and now a 700 b$ bailout... When are they gonna bail me out.

http://www.greenfaucet.com/the-market/no-magic-tonic/62480

http://www.greenfaucet.com/the-market/credit-crunch-hitting-main-street/97414

[Jeff Hansen]

The problem is the market is already starting to panic. Look at the VIX, I was just reading earlier today about the 5 highest VIX readings ever. We are in some eery company here.

http://www.greenfaucet.com/traders-talk/the-top-five-vix-spikes-and-their-catalysts/98251

[subgenius]

207 for

226 against

Paulson & Bernanke = EPIC fail

[Kirk Rocheford]

Paying out 32 cents on the dollar. They tell you not till Oct 13th. The rest will will come when they sell securities. Oh, that should go well in this environment. Like they will get more at a later date. This is crazy! These people are not even going to jail. No one in Washington even talks about this.