- There are several types of money market funds: government (including US Treasury), prime, and municipal.
- The Federal Reserve has cut interest rates and instituted programs to help ensure the smooth operation of the short-term credit markets that prime money market funds invest in.
- Fidelity manages its money market funds conservatively. All Fidelity money market funds have ample liquidity and continue to provide safety and security for our customers.
The Federal Reserve has announced the creation of the Money Market Mutual Fund Liquidity Facility, with the goal of enhancing liquidity in the short-term credit markets in which some money market mutual funds invest. Other steps the Fed is taking to alleviate stress in financial markets, and to support the broader economy, include lowering the federal funds rate to a range between 0.00% and 0.25% from a range between 1.00% and 1.25%, and increasing its holdings of US Treasury and mortgage-backed securities by $700 billion.
The Fed's actions and money market mutual funds
When considering what all of these Fed actions may mean for individual money market fund investors, it's important to first understand that there are several types of money market funds with different features and that they invest in different types of assets. This means that different funds respond to volatile markets in different ways.
Differences among money market funds
Money market funds are mutual funds that invest in debt securities with short maturities and minimal credit risk. Their prices reflect the net asset value (NAV), which is the total value of all the securities in the portfolio divided by the number of shares outstanding. Treasury and government money market mutual funds,1 such as Fidelity Government Money Market Fund (SPAXX), invest in the highest-quality, lowest-risk securities issued by the US government and repurchase agreements collateralized by government securities. Treasury and government funds are designed to maintain a stable NAV of $1.00 and they do not place restrictions on investors' ability to access their money in the funds. Government money market funds are open to both retail and institutional investors.
Prime funds are the second major type of money market mutual fund. While government funds invest in securities issued by the government and repurchase agreements backed by government securities, prime funds also invest in short-term instruments issued by corporations, such as commercial paper and certificates of deposit. Retail prime funds,2 such as Fidelity Money Market Fund (SPRXX), also offer $1.00 NAVs, but they differ from government funds in that they may invest in more types of securities and may restrict the ability of investors to access their money in times of severe market stress, either by charging fees to redeem shares or by imposing restrictions on redemptions known as gates.
(Institutional investors with significant assets may invest in institutional prime money market funds, like Fidelity Investments Money Market Prime Reserves Portfolio—Class I (FDPXX). These funds also may restrict redemptions in times of stress by using liquidity-triggered fees or gates. They differ, however, in that their NAVs do not remain stable at $1.00, but instead may "float" slightly around $1.00.)
Municipal money market funds, such as Fidelity Municipal Money Market Fund (FTEXX), that invest in short-term securities issued by state and local governments are similar to retail prime funds3 in that they also offer stable $1.00 NAVs but can restrict investors' access to cash during extreme market conditions.
For all these types of funds, the Fed's support of the short-term markets will help to maintain the highly liquid nature of money market funds. Money market fund yields are likely to trend lower following the recent interest rate cut. Yields on money market funds tend to follow short-term rates set by the Fed, although typically with a lag.
Negative interest rates aren't likely, but they're not impossible
No one can predict with certainty the ultimate direction of interest rates. However, at this time, we believe it is unlikely the Fed will adopt a negative interest rate policy. Fed chairman Jerome Powell has said that he does not see negative interest rates as an appropriate policy for the US and several Fed governors have publicly stated their opposition to negative interest rates because they say that such rates are not effective in stimulating the economy. Still, because interest rates are set by the market as well as by Fed policy, yields on individual Treasury securities could eventually turn negative.
For money market funds, lower and even negative yields on the assets that they invest in raise the possibility that their net yields, which are their gross yields minus the expenses of operating the fund, could fall below zero. At Fidelity, we are closely monitoring the yields on our funds and if they approach zero, we may consider waiving certain fund fees to prevent that from happening. Any such waiver would be voluntary and could be discontinued at any time. There is no guarantee that a fund will be able to avoid a negative yield.
It's important when thinking about yields to keep in mind the difference between a fund's yield and its NAV. A fund's NAV is not the same as its yield, which is the term for the annualized rate of return produced by the securities in the fund. Even if a fund has a very low or negative net yield, it does not mean that a fund that seeks to maintain a stable NAV has "broken the buck" or dropped below its objective of maintaining a stable $1.00 NAV.
Money market funds remain viable investment options
Although yields have come down along with rates, we believe that the fundamental virtues of liquidity and safety that cause investors to choose money market funds have not changed. Nor do we believe a low-rate environment represents a leap into the unknown for investors in money market funds. From December 2008 until December 2015, the federal funds target rate stood as it does now at 0.00% to 0.25%. During that 7-year period, the assets investors held in money market mutual funds held steady at more than $2 trillion, according to iMoneyNet. Now, as then, money market mutual funds invest in the most liquid instruments available, including Treasury securities and repurchase agreements. Today, the markets for these instruments continue operating as usual and now enjoy the additional support provided by the Fed.
Money market funds at Fidelity
Even while volatility roils markets, Fidelity's money market funds continue to provide safety and security for our customers. Our funds invest in high-quality money market securities and we are vigilant in keeping our money market funds safe, which has always been our highest priority. We also regularly stress test our money market funds, and we're confident they can withstand significant market volatility. Stress testing is an ongoing process which we review and update and has proved to be a valuable risk management tool in previous volatile markets.
Our money market mutual funds have ample liquidity and investors have access to their funds at any time. The daily and weekly liquidity of each Fidelity money market mutual fund is published daily on its Fidelity.com page.
We closely monitor activity in the short-term credit markets and the interest rate environment and make adjustments to our portfolios, as needed. Learn more about how Fidelity manages money market funds.