What the Debt Ceiling Means for Money Market Mutual Funds

Financial Advisors

  • Yields on money market mutual funds have recently become attractive, but some investors are concerned about increased risk as the debate over the debt ceiling heats up.
  • Crane data shows that yields track closely the rate of federal funds, with some of the largest funds paying close to 5% or more.

After years of low returns, money market mutual funds have recently become more attractive thanks to a series of rate hikes by the Federal Reserve. But some investors worry the risks will mount as the debt ceiling debate heats up.

Money market funds, unlike money market savings accounts, typically invest in low-risk, short-term debt such as treasury bills and may be suitable for short-term investment objectives.

Yields track closely the Federal Funds rate and have recently reached the target range of 5% to 5.25%. As a result, some of the largest money market funds are paying nearly 5% or more of him as of May 9, according to Crane’s data.

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Amid rising default fears, investors fear that money market funds will “go bankrupt” when the fund’s so-called net asset value, or total assets minus liabilities, falls below $1.

But Wiener said that for large institutions such as Vanguard, Fidelity Investments and Charles Schwab, “splitting money” is rare and less of an issue.

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In addition, money market funds are “ladder masters”, investing in different assets with staggered maturities, which means they are “rolling over securities all the time,” Wiener said.

Despite the looming debt ceiling, advisers still recommend money market funds for cash.

Chris Mellone, a certified financial planner and partner at VLP Financial Advisors in Vienna, Virginia, is currently proposing a money market fund that uses US Treasuries with maturities of 30 days or less for yield and flexibility.

“If there is an opportunity to create volatility, we believe it will be capital that can be leveraged after the market sells out,” he said.

Of course, money market fund yields could fall if the Federal Reserve starts cutting rates again. Timelines are difficult to predict, but some experts expect rate cuts to start before the end of 2023.

However, these assets may still be attractive for the foreseeable future. To compare performance, you can check his 7-day SEC yields for money market funds. This shows the annual return after deducting fees.

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