Money Market Accounts Becoming Popular

Painful Times Ahead For The Money Market Accounts?

The financial crisis of 2008 wreaked havoc on the money market. Money market accounts and money market mutual funds suddenly froze as sources of cash collapsed. A large money market mutual fund, the Reserve Primary Fund, had its shares trade below $1, resulting in a bailout. The Federal Reserve’s actions during the crisis, lowering the Federal Funds Rate to effectively 0 percent and engaging in massive liquidity operations, further harmed the money market. Today, the average rate of return on a taxable money market mutual fund is a pathetic .04 percent. This is a far cry from the average of 5 percent in 2007, according to the research firm Crane Data LLC. (1)

Money market funds have been closing one after another, thanks to disastrously low interest rates. The Investment Company Institute, an industry trade group, reports that the number of money funds has dropped over 20 percent. Furthermore, many money market mutual funds are exposed to toxic European debt, raising the risk of another crisis in the money market if the European debt crisis leads to default. (2) 2008 would be repeated all over again, except on a global scale. The money market is imperiled by negative economic conditions, putting investors in a painful position.

Conservative investors who have a significant allocation to cash equivalents like a money market account seem to be at a loss. Rates are so low that even moderate official inflation, reported at 3.6 percent in June 2011, eats away at their money. The shrinking number of money market mutual funds portends further bad news for this market. Even rates paid on a high-yield money market account are devastatingly low. For instance, according to the website RateCatcher, the highest yield on a money market account is offered by Sallie Mae at 1.15 percent. With a 3.6 official inflation rate, this works out to a real loss of -2.45 percent. (3)

The money market may yet see some good news in the future. Yields on 10-year Treasurys rise and fall in response to the economic outlook. The Federal Reserve’s announcement of a second round of quantitative easing in November sent yields on the 10-year shooting upward as investors moved from bonds to stocks. 10-year yields peaked at just over 3.6 percent before falling again due to renewed economic concerns. (4) As the economy slowly recovers, yields should recover, too, giving money market account investors a second lease on life.