After years of low returns, money market mutual funds have recently become more attractive, thanks to a series of interest rate hikes from the Federal Reserve. But some investors worry about increased risk as the debt ceiling debate intensifies.
Money market funds — which are different than money market deposit accounts — typically invest in lower-risk, short-term debt, such as Treasury bills, and may make sense for short-term investing goals.
Yields closely follow the fed funds rate, which recently reached a target range of 5%-5.25%. As a result, some of the biggest money market funds are paying nearly 5% or more as of May 9, according to Crane data.
In May, money market fund assets jumped to a record $5.685 trillion, with a surge of inflows since the collapse of Silicon Valley Bank and Signature Bank in March.
But as the debt ceiling deadline approaches, some investors have concerns about a possible default, and how it may affect government-backed assets, including some money market funds, according to Daniel Wiener, chairman of Adviser Investments.
Investors worry funds may ‘break the buck’
As default concerns rise, investors fear money market funds may “break the buck,” which happens when a fund’s so-called net asset value, or total assets minus liabilities, falls below $1.
However, Wiener says “breaking the buck” is rare and less of an issue for larger institutions like Vanguard, Fidelity Investments or Charles Schwab, because these companies have “money available to support their money market funds.”
He adds: “I do not lose one second of sleep, worrying about my Vanguard or Fidelity money market accounts.”
What’s more, money market funds are “masters of the ladder,” Wiener said, meaning funds invest in a range of assets with staggered maturities, so they are “constantly rolling over securities.”
Money market funds may provide an ‘opportunity’
Despite the looming debt ceiling, advisors are still recommending money market funds for cash.
Chris Mellone, a certified financial planner and partner at VLP Financial Advisors in Vienna, Virginia, currently suggests money market funds with Treasuries with maturities of 30 days or less, which may provide yield and flexibility.
“We think that if there’s an opportunity that causes volatility, this is going to be money that we could use to put to work after the market sells off,” he said.
Of course, money market fund yields may drop when the Federal Reserve begins cutting interest rates again. While it’s difficult to predict the timeline, some experts expect rate cuts may begin by the end of 2023.
But these assets may still be appealing in the meantime. To compare performance, you can review a money market fund’s seven-day SEC yield, which shows an annual return after fees.