The Great Yield Chase: Why A Trillion Has Fled Traditional Bank Accounts by emilymason00
When considering where to move your idle cash, liquidity is a key consideration. Both high yield bank savings accounts and money market mutual funds allow you to pull your money out whenever you want without penalty, while CDs, and Treasury bills and bonds are longer-term investments.
Keep in mind that money market fund yields fluctuate along with short term interest rates. If the economy enters a recession and the Federal Reserve lowers its target federal funds rate, the funds’ yields will move down too. Somewhat longer-term investments present an opportunity to lock-in today’s high interest rates.
If skittish investors suddenly rush to withdraw their cash from a money fund, that fund might have to sell underlying treasuries before their maturity dates to meet withdrawal requests–and maybe sell them at a loss. Such scenarios create concern that money market funds might lose the ability to pay back investors dollar-for-dollar—that’s known in the industry as “breaking the buck.
Money market funds geared to ordinary investors come in different varieties–some invest in U.S. Treasury securities; some also hold government agency debt; some hold municipal debt ; some hold mostly commercial debt.
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