Money market fund freezes redemptions on sub-dollar net asset value. A buzz-phrase that we are likely to hear a lot more of today and in the coming days is “breaking the buck.” The expression refers to the very rare situation where a money market fund, touted as one of the safest places to park cash short of storing it under the mattress, sees its net asset value (NAV) fall below $1.00. Money market funds operate with a NAV of $1.00 and pay interest on that basis. They are designed to be extremely liquid and safe.
Reports are out this morning that a major money market fund known as Primary Fund, managed by The Reserve (inventors of the money market fund), has broken the buck. Its NAV fell to 97 cents as of 4:00pm EST Tuesday, reported MarketWatch and Bloomberg. The reason it fell is because it was exposed to $785 million worth of Lehman Bros. (NYSE: LEH, Stock Forum) debt, the value of which has been reduced to zero in the wake of the investment banker’s bankruptcy filing.
But that’s not all – Primary Fund has frozen redemptions for seven days. MarketWatch reported that Primary Fund was subject to $40 billion worth of redemptions between this past Friday and 3:00pm EST Tuesday, a 64% decline that took assets from roughly $62 billion to $23 billion in under three business days. The freeze applies to both retail and institutional investors.
Whether or not more money market funds break the buck remains to be seen. Many big fund managers have already issued statements claiming that they have no exposure to Lehman or AIG (NYSE: AIG, Stock Forum) debt. But Lehman and AIG are only two companies, and they are the only two under the gun right now. And holdings aside, the perception of trouble in the traditionally stable world of money market funds might be enough to trigger across-the-board redemptions.
Source : stockhouse
No comments:
Post a Comment