Monday, April 14, 2008

Impact of falling money market fund yields

None of us is thrilled with the way that the yields on money market funds are falling, but there is a very positive upside silver lining to that dark cloud: lower money market fund yields imply lower commercial paper yields which means that a wide range of businesses are seeing their short-term financing costs decline substantially. This decline in short-term financing costs could well be a far bigger boost to business than any of the incentives being offered by Congress. In any case, it is a clear positive for business.

Also, money market funds hold short-term repurchase agreements which is a way for financial institutions to gain additional short-term liquidity using their illiquid assets (mortgage and loan debt) at a fairly low cost. Falling money market yields further lower those costs for financial institutions, giving them assistance on working their way through their current balance sheet adjustment process.

You may not realize it, but your investment in money market funds may be doing just as much good for the financial system as all of the billions of dollars that the Federal Reserve is throwing at the problem.

Now, if only I could convince the Federal Reserve to raise interest rates so that I could get a more decent compensation for all of the value that my investment is creating for the economy.

-- Jack Krupansky


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