Better Safe Than Sorry: Put Cash in US Treasury Money Market Funds

Last year, we advised investors to transfer all money market assets to money market funds that invest exclusively in US Treasuries Notes (Better Safe Than Sorry” Aug 21, 2007).

That was due to the then new credit crisis and the then recent insolvency of a money market fund and the risk of some funds “breaking a buck” (NAV falling below $1.00).

Today we reissue and redouble that advice, and take it one step further.

For all of your liquidity (”cash” and “near-cash”) in money markets or in banks:

• If it’s in a money market fund, transfer assets to a US Treasuries money market fund (which means no corporate debt or government sponsored enterprise debt).
• If it’s in a personal or business bank account, reduce the account to $100,000 (the FDIC insured amount) and place the balance in other banks with $100,000 limits per account, or with a solid US Treasuries money market fund.

With FannieMae (FNM) and FreddieMac (FRE), who hold about 1/2 of US mortgages, considered to be insolvent, and IndyMac (IMB) seized by the FDIC on Friday in the second largest bank failure in US history, and with the ripple effects that will result throughout the financial sector, you should not expose yourself to the consequential risk of loss in your “cash” position.

The yield advantage of holding money market assets exposed to credit risk is not great enough to warrant the current elevated default risks in the market place.  Money market losses are unlikely, but do you want to take that risk in today’s environment versus the reasons you hold liquid reserves in the first place?  We don’t and we are not.

We issue this advice beyond investment portfolios.  We think your business bank accounts should be evaluated too.  If you can avoid holding amounts above the insured limits, then you should consider doing so.

Intentional risk in stocks and bonds is one thing, but unintended risk in what was thought to be safe portfolio cash reserves or business operating funds is something else altogether.

There is risk enough in your stock and bond allocations.  Your cash liquidity position needs to safe so you won’t be sorry.

Comments

[TA:]

This the biggest 'the sky is falling' article I've read in years.

'If it’s in a personal or business bank account, reduce the account to $100,000 (the FDIC insured amount) and place the balance in other banks with $100,000 limits per account, or with a solid US Treasuries money market fund.'

Fear doesn't getting bigger than this unless you count hoarding canned food, gold and building a bunker(I haven't seen an article on this site recommending that YET)

2008 Jul 13 01:47 PM

[QVM Group:]

Blah-Blah;

There is a difference between fear and prudence. Do you think the people who have lost their excess deposits in IndyMac are dealing with the sky falling or did they actually lose their money -- they lost money.

The FDIC is currently monitory 90 banks for possible faillure and more people will lose money.

If you have bank accounts with more than $100,000 in them, you probably will not lose money, but why take the chance?

You comment about canned food is not a reasonable response to a call to protect cash from unintended risks.

2008 Jul 13 02:11 PM

[QVM Group:]

Thanks Michael.

Pure Treasury funds are hard to find. We use one at Schwab too (SWUXX) but it is closed to new accounts.

The yield give-up is substantial, but I'm happy to earn less during the storm to make sure I don't lose more.

Example, Schwab's "regular" money market (SWMXX) currently has a 7-day yield of 1.93%, while the Treasuries money market fund has a 7-day yield of 1.18%.

That's fine with me while companies controlling half the country's mortgages are on the brink of a bailout.

How their GSE debt held by commercial banks will be traded and valued is an unknown. When the situation is as clear as mud, I'd rather be watching than playing.

2008 Jul 13 05:51 PM

[jzfly:]

OK, the IndyMac failure is expect to cost the FDIC $4 - $8 billion and more than 300 FDIC insured banks could fail in the next three years according to Gerard Cassidy but the FDIC only has about $52.8 billion, well you do the math. The FDIC will also fail and not 1 penny of our money will be insured! User 164588 is right. This could be the most devastating financial disaster ever. We should either buy gold or put our money in the mattress. What do you think?

2008 Jul 13 07:40 PM

[QVM Group:]

Interesting Fact:

... the percentage of uninsured deposits has doubled since 1992, climbing to about 37% of the nation's $7.07 trillion in deposits at the end of the first quarter, according to an analysis of data reported to the FDIC. [WSJ July 13,2008]

2008 Jul 13 09:16 PM

[phdinsuntan...:]

why greenbacks? get euros, aussies, ok

2008 Jul 14 08:23 AM

[gbaby:]

What about tax-free money market funds, Like Vanguard NY Tax Free MMF? The creidt risk is also small, isn't it?

2008 Jul 15 05:27 PM