WALL STREET – New alarms were set off in the financial markets yesterday when the net asset value of a well-known money market fund fell below the $1 mark, a condition traditionally known as “breaking the buck,” sending new shockwaves through another key liquidity market for credit unions.
The concerns, caused by increased volatility in money market instruments – such as Fed Funds, Treasuries and repurchase agreements – were threatening to spread to other money market funds, according to Christopher Sullivan, chief financial officer for United Nations FCU. “The money market area has become much more volatile,” Sullivan told The Credit Union Journal yesterday.
Money market funds are a key provider of short-term liquidity for credit unions, allowing them to invest in such instruments as overnight Fed Funds and short-term Treasuries through an active manager. Credit unions have as much as $5 billion invested with money market funds.
The threat to the money markets came as the stock and bond markets were plunging again yesterday at the demise of another central financial institution, insurer American International Group, which was effectively taken over by the government. The move follows last week’s government takeover of Fannie Mae and Freddie Mac, Sunday’s takeover of Merrill Lynch and Monday’s failure of Lehman Brothers.
The concerns for money market funds were sparked after the Reserve Primary Fund on Tuesday announced that its NAV had fallen below $1 a share, the first time a money market fund had breached that mark in 14 years. The cause was some $660 million of debt securities the $65 billion fund held in Lehman Brothers Holdings.
Yesterday, the Securities and Exchange Commission issued new guidance on how banks may support their money market funds to stem a similar decline.
Charles Felker, vice president at credit union bond house First Empire Securities and a former NCUA investments officer, said most money market funds set their NAV to be around $1. “But there’s no guarantee that it won’t go below a buck.”
John Jeffries, who administers the Callahan CU Financial Services’ Trust for CUs and its money market fund, said the Trust expects the fund, to weather the storm because it has avoided instruments issued by Lehman, American International Group and other troubled issuers and kept to safe instruments such as short-term Treasuries and agency securities. The fund holds about $700 million in credit union money.
“The yields our investors have seen have been volatile, but certainly the markets have been too,” said Jeffries.
The Callahan manager cited three reasons a money market fund may “break the buck.” They are: exposure to a troubled entity (e.g. Lehman); a major change in rates or a liquidity crisis.
Neither the Money Market Fund nor the two other funds administered by the Trust for CUs have seen major redemptions since the onset of the market crisis last week, according to Jeffries. “Our balances have been extremely stable,” he said.
The funds are marketed by Callahan and Associates and are managed by Goldman Sachs & Co.
Money market funds for credit unions are restricted in what they can hold to those instruments also approved for federal credit unions, such as Treasuries, agency bonds and Fed Funds deposits.
