MONEY-MARKET funds in the US suffered an estimated $197 billion of net outflows last week as confidence in their safe-haven status weakened after one fund "broke the buck" and others closed.
The outflows mark a new and potentially dangerous phase for the $3,400 billion money-market fund industry as continued redemptions could result in forced selling of their securities into illiquid bond markets.
Some money-market fund operators are facing the prospect of either closing funds to halt redemptions or engineering more costly bailouts of their funds.
The funds, which in the past two years had huge inflows from retail and institutional investors, were rocked last week by the news that the oldest, Reserve's Primary fund, would return only 97 cent in the dollar. It was the first time in 14 years that a fund had "broken the buck" with its shares falling below their par value of $1, meaning that investors selling them will receive less than they paid in.
Shareholders in the Reserve fund on Friday filed a lawsuit in the US District court in Manhattan, charging that the fund had failed to follow its objective of preserving capital and instead had pursued yield by buying $785 million in Lehman commercial paper. The fund had to write down the value of that paper to zero and closed the fund.
Putnam last week closed a money-market fund to avoid losing investors' money. The fund did not close because it held subpar holdings but because high levels of redemptions were going to cause it to begin forced selling in an illiquid market. That would have resulted in heavy losses to investors.
On Friday, Lehman Brothers closed three Dublin-based cash funds for similar reasons.
Investors last week continued to seek safer ground, taking big sums from money-market prime funds, which invest in corporate debt, and putting some of that into Treasury funds, which buy Government bonds.
The single biggest outflow was from institutional prime (non-Government) funds, which had outflows of $130 billion on Wednesday alone, according to iMoneyNet, which tracks the industry.
Investors have viewed money market funds as virtually as safe as a bank account, but the funds have not been backed by Federal guarantee. - ( Financial Times service)
