With all the market volatility lately, it is a little surprising that investors are concerned about the most stable part of their portfolios, their money market funds. We believe the concern has been driven by (1) a lack of knowledge about money market reforms instituted after the financial crisis, and (2) headlines in the financial press about the Fed intervening to support liquidity in money markets.

Money Market Reforms After the Financial Crisis

First, a little history — in 2008, when Lehman Brothers collapsed, the original money market fund, the Reserve Primary Fund, “broke the buck.” Money market funds seek to maintain a stable net asset value (NAV), typically at $1 (that’s the “buck” that got broken). Over the course of two days, the Reserve Primary Fund received investor redemption requests greater than 50% of the fund’s value. The managers of the fund were unable to sell assets (including some of their Lehman commercial paper) quickly enough to satisfy redemptions. They deemed some securities worthless and marked the fund’s net asset value (NAV) down to $0.97. Until that point, investors did not think they could lose money in a money market fund. Outflows across the money market fund industry ensued, prompting the Federal Reserve to support the market.

In the aftermath of the financial crisis, the SEC implemented reforms to the money market industry which have been in effect since 2016. The key element of the regulation was breaking money market funds into three categories: Retail, Government, and Institutional.

Retail Government Institutional
Limited to retail investors Open to all investors Open to all investors
Maintains a $1 NAV Maintains a $1 NAV Maintains a floating NAV
May impose liquidity gates of up to 10 days & redemption fees of up to 2%.

Prime funds can invest in commercial paper, asset-backed securities, etc.

Must invest at least 99.5% of assets in cash, US government securities, and/or repurchase agreements that are collateralized solely by US government securities or cash. May impose liquidity gates of up to 10 days & redemption fees of up to 2%.

Prime funds can invest in commercial paper, asset-backed securities, etc.

 Greenleaf’s Money Market Fund Selection

Our primary money market fund falls under the category of a ‘Government’ fund. It maintains a stable $1 NAV and invests in that much more restricted pool of government-backed securities. It is, therefore, insulated from issues in corporate funding markets.

Money market funds now also report daily and weekly liquid assets on their website. For our primary vehicle, daily liquid assets have averaged close to 90% over the past few months. Weekly liquid assets have been 97-100%. We do not have any concerns about the ability of this fund to maintain its stable NAV and meet our clients’ needs. As noted in the table above, the fund is only invested in cash and US government securities. In addition, the fund has been seeing net inflows, not outflows, so far year to date.

Some investors are wondering if money market funds are FDIC-insured like savings account balances. They are not. However, in our fund, the manager invests exclusively US government securities, and the US government is the ultimate backstop for FDIC insurance as well.

While ‘Government’ funds have been seeing inflows, ‘Prime’ money market funds have been preparing to see large outflows. As a result, the managers of those funds have been unwilling to continue purchasing the same level of commercial paper as before. Commercial paper is basically short-term loans issued by corporations to cover cash flow needs like payroll and accounts payable. As a result of this caution, interest rates on commercial paper began to rise. The Federal Reserve took note, and instituted a couple of steps to support the market.

Federal Reserve Support of Money Market Funds Garners Headlines

Imagine you are a corporate borrower who uses commercial paper to finance its operations. All of a sudden, no one wants to buy your commercial paper. The typical buyers are prime money market funds, and the managers of the funds are preparing for outflows. The rates you have to pay spike, or you are unable to get financing at all. That’s a big problem!

On Tuesday, March 17, the Fed announced an emergency measure, which they also used during the financial crisis, to begin buying commercial paper directly. This will temporarily ensure that funding is available to corporate borrowers who need it. The program is called the Commercial Paper Funding Facility and is operated in coordination with the Department of Treasury. Treasury Secretary Mnuchin stated that the Fed could buy up to $1 trillion in commercial paper. That’s a lot. The total amount of commercial paper outstanding is about $1.1 trillion. The Fed is effectively stepping in to make short-term loans directly, and is willing to make a very substantial amount of loans.

On Wednesday, March 18, the Fed announced a second program to support money market fund called the Money Market Mutual Fund Liquidity Facility. Similar programs were instituted during the financial crisis as well. Through this program, the Fed will assist money market funds in meeting investor redemption requests by making secured loans to banks, if those banks step in to buy assets from money market funds and thereby give the funds cash to make redemptions.

On both sides of this market, the Fed has stepped in to provide liquidity. For corporate borrowers, the Fed is now buying their commercial paper directly. For savers, the Fed has now stepped in to ensure you get your money market fund savings back near par.

These interventions garnered a lot of attention in the financial market press. Reading those headlines, and remembering the losses incurred in the Financial Crisis, investors grew concerned. The situation today, however, because of new regulations and early Fed interventions, appears much more stable.


Our investment philosophy calls for maximizing expected returns for a given level of risk. We do not consider clients’ money market funds as an attractive place to chase yield in search of higher returns. As a result, we are invested in a conservative option. We are satisfied with that choice, and we know clients appreciate the stability in these volatile times. If you have any questions, please feel free to contact a member of your client centric team.