On September 19, 2008 the money market guarantee program was instituted following the Reserve Primary Fund breaking its $1 Net Asset Value. The program covered all money market mutual funds regulated under the Investment Act of 1940 which maintained a stable share price of $1. In essence the government was trying to calm investor fears after the second $1 break in US history, and prevent a strong run on the banking system. Broker dealers bought into the system and it worked well enough to prompt an extension of the program. Now that program is set to expire on September 19, 2009.
Currently there is $3.5 trillion invested in money market funds. The average money market, seven-day compounded yield is .06% according to the Money Fund Report. The government has hopes the program will slide out of existence under the radar but I don’t think that will be the case. For the past few weeks the dollar has been hammered, gold and commodities have soared, while bonds have remained relatively flat to up. With the enormous amount of cash in the money market funds, and the incredibly pathetic yield, perhaps treasuries are being bid to secure the government guarantee that is set to expire. We shall keep our eyes open on the 19th to see if it does indeed slowly fade into the night.
