What happens to money market funds if US defaults?
Are your money market funds about to get steamrolled if Congress fumbles the debt ceiling and the U.S. Treasury defaults on its debt? In the bleakest scenario, some money market mutual funds could “break the buck.” That's when a fund's price per share—or its so-called net asset value (NAV)—slides below $1.
A15: If a money market mutual fund held securities on which the U.S. Treasury defaulted on the payment of interest or principal, then the fund would need to sell those defaulted securities, unless the fund's board of trustees determines that disposing of the securities would not be in the best interests of the fund.
The Bottom Line. Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't. Banks use money from MMAs to invest in stable, short-term securities with minimal risk that are liquid.
If you want to shift into cash, the safest option may be to sock away the money in a high-interest savings account at an FDIC-insured bank that pays a rate of more than 4% or in certificates of deposit, experts say.
First and foremost, money market accounts are typically safe because they're insured by the federal government. If you open a money market account at a federally insured bank, the Federal Deposit Insurance Corp. (FDIC) insures up to $250,000 of your cash per bank, per depositor.
Money market accounts held at banks are FDIC-insured for up to $250,000 per depositor, per insured bank. Most credit unions provide similar coverage. If your balance exceeds the coverage limit—and your financial institution fails, which is rare—you could lose those excess funds.
Even though this is a rare occurrence, it can happen. Breaking the buck generally signals economic distress because money market funds are considered to be nearly risk-free.
Tried and true basics. "We're advising people to prepare for a potential default as you would for an impending recession," says Anna Helhoski of NerdWallet. That means tamping down on excess spending, making a budget, and shoring up emergency savings to cover at least three months of living expenses.
Runs on money market funds have been rare. In 2008, a large money market fund that was over-exposed to commercial paper issued by failed bank Lehman Brothers suffered a run on assets, forcing its net asset value to fall below $1, a term known as "breaking the buck."
They point to good financial housekeeping, including saving, reducing expenses and using proper asset allocation, as ways people can protect themselves in the event of a default.
Should I keep all my money in a money market account?
If you want to put your money in a high-yield account for a short-term savings goal, money market accounts have many benefits. If you want to withdraw money frequently or save for long-term goals like retirement, a checking account and investment account or high-yield savings account would be better options.
Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.
Both CDs and MMAs are federally insured savings accounts, so they're equally safe. Up to at least $250,000 gets insured in your name across your individually owned accounts at one bank or credit union. (Learn more about federal deposit insurance.)
The Bottom Line
While money market funds aren't ideal for long-term investing due to their low returns and lack of capital appreciation, they offer a stable, secure investment option for individuals who are looking to invest for the short-term.
The Federal Deposit Insurance Corporation (FDIC), an independent government agency, insures deposit accounts—checking accounts, savings accounts, money market accounts that don't contain invested funds, and CDs, for example—at most banks and savings and loans institutions.
Money market funds are another option for holding on to cash during a recession. While their yields may eventually fall when interest rates do, they can offer protection for your capital and easy access to your cash when longer-term investment opportunities reappear.
However, money market funds are not suitable for long term investment goals, like retirement planning. This is because they don't offer much capital appreciation.
On Sept. 16, 2008, the Reserve Primary Fund broke the buck when its net asset value (NAV) fell to $0.97 cents per share. It was one of the first times in the history of investing that a retail money market fund had failed to maintain a $1 per share NAV. The implications sent shockwaves through the industry.
- Advantages of money market accounts often include high yields, liquidity and federal insurance for your funds. ...
- Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.
How much should a money market investor be concerned with that risk? Smith: Since their introduction in 1971, money market funds have broken the buck just two times. The first was in 1994, when a fund was liquidated at 96 cents per share because of large losses in derivatives.
Are money market funds federally guaranteed?
Money market mutual funds, on the other hand, are not federally insured. These funds are considered short-term, low-risk investments and are typically offered by brokerages — which are not covered by the FDIC or NCUA — instead of banks or credit unions.
Stability & safety
While not insured by the FDIC, the funds are required by federal regulations to invest in short-maturity, low-risk investments, making them less prone to market fluctuations than many other types of investments.
While no one knows precisely what a default would entail, consumers can rest assured that their Treasuries and certificates of deposit are reasonably safe.
There's a roughly one-in-four chance that the US will hit the so-called X-date — at which the government runs out of cash — without a deal to raise the debt limit, and the odds are getting worse, according to JPMorgan Chase & Co.
So if the U.S. cannot pay its creditors, interest rates on U.S. debt would go up, creating a cascade of higher interest rates. So mortgage rates, credit card rates, car loan rates. All would become more expensive. Finally, there is a real concern about the economy — that a default could spark a recession.
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