Money-market funds 'break the buck'

Last week the oldest money-market fund in the US 'broke the buck' – i.e. it returned less than investors had put in. Similar funds operate in the UK. So are they really the place to be putting your cash?

With all the talk this week surrounding the "mother of all bailouts", an equally worrying rescue package went almost overlooked. As Hank Paulson was campaigning for $700bn to save Wall Street, President Bush announced that money-market funds would be allowed to tap up to $50bn from an emergency fund set up during the Great Depression.

Why the worry? Money-market funds invest in Treasury bills, short-term debt issued by banks (commercial paper) and other low-risk securities. They are not backed by a Federal guarantee (until now, at least), and thus typically pay a higher interest rate then savings accounts. But because they "have almost always produced positive returns", they've been seen by investors as being as safe as bank accounts, says the Washington Post. That faith proved misguided when last week the oldest money-market fund in the US, the $60bn Reserve Primary Fund, 'broke the buck'. That's industry jargon meaning that it would return less than investors had put in (97 cents in the dollar, in this case) only the second time in history this has happened. It turned out Reserve Primary was holding $785m of Lehman Brothers debt, which had to be written down to zero after the bank went bust.

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Jody Clarke

Jody studied at the University of Limerick and was a senior writer for MoneyWeek. Jody is experienced in interviewing, for example digging into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.