Billions stream into ultrasafe government funds
Amid concern about the credit crunch, institutional investors are shifting money out of money market funds that could potentially hold risky corporate debt and into other money funds that invest only in ultrasafe government securities.
Individual investors so far aren't fleeing, but there are signs they're getting nervous.
Assets of all money funds that cater to big institutions rose $22 billion from Aug. 14 through Tuesday, says iMoneyNet, which tracks the funds. Money funds are a traditional safe haven when the stock or bond markets are in turmoil.
But prime money funds that cater to big institutions saw their assets fall $24 billion the same period, iMoneyNet says. Institutional money funds that invest only in government securities, such as Treasury bills, saw assets jump $46.1 billion.
"It's a safe bet that not only have some investors left prime funds, but that new money has stopped coming in," says Connie Bugbee, managing editor at iMoneyNet.
"It's a perceived safety issue," Bugbee says. "Investors are willing to give up a little yield to stay in governments." Because government-only funds invest in safer securities than prime money funds do, they yield slightly less than prime money funds. The average prime institutional money fund yields 5 percent, versus 4.5 percent for prime government-only money funds.
Individual investors seem to be more confident, at least for now: Assets of prime retail money funds gained $3.9 billion from Aug. 14 though Tuesday. But assets in government-only money funds jumped $13.9 billion.
"We've had positive inflows in government-only funds, and flows have been neutral in prime and tax-free funds," says Meghan McAndrew, a spokeswoman for Federated Investors.
At Vanguard, inflows to money funds of all stripes have been strong, the fund company says.
"We have been largely reassuring clients," says Vanguard spokesman John Woerth. Vanguard's Prime Money Market fund has no exposure to a type of corporate debt called asset-backed commercial paper, which has been one source of worry in the subprime credit crunch.
Most analysts suggest that worries about money funds, which have $2.6 trillion in assets, are unfounded. Money funds strive to keep their share prices at $1 each day. The only money fund ever to "break the buck" was the tiny institutional Community Bankers U.S. Government Money Fund in 1994.
Money funds hold high-quality short-term investments, and fund companies, eager to keep the industry's record clean, would probably step in to shore up a fund's share price if a major holding of the fund defaulted.
Some funds have already moved to upgrade their holdings. The Evergreen funds say they've reduced their exposure to asset-backed commercial paper.
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