U.S. Fixed Income

Money Market Funds Weather Liquidity Crunch

Post‑GFC regulations and Fed programs support money funds.
April 2020
Joseph K. Lynagh, Portfolio Manager in the Fixed Income Division at T. Rowe Price
Doug Spratley, CFA®, Portfolio Manager

Key Insights
  • We believe the ability of the money markets to function relatively well in environments challenged by both credit problems and illiquidity sends a positive signal.
  • The Fed took a money market backstop from the GFC “off the shelf” and quickly re‑implemented it, showing how lessons learned then can be applied now.
  • We believe the money fund industry has emerged from the current crisis positioned for stability as a result of post‑GFC regulations and aggressive central bank support.


Recently implemented Federal Reserve measures, combined with money market fund regulations established after the global financial crisis (GFC), supported money funds through the March liquidity crisis. The coronavirus pandemic triggered selling pressure and reduced liquidity in almost all financial markets as investors rushed into cash. This contrasts with the GFC, when credit problems caused a loss of confidence in money market funds. We believe the ability of the money markets to function relatively well—albeit with support from the Fed—in environments challenged by both credit problems and illiquidity sends a positive signal about the stability of money market funds industrywide.

Fed Helped Stabilize Money Markets in 2008

In 2008, a large, non‑T. Rowe Price money market fund “broke the buck” when its net asset value fell below USD 1.00 per share as a result of its exposure to debt issued by Lehman Brothers. This caused a run on (or massive redemptions of) other money market funds, driven primarily by institutional holders. The Fed offered emergency loans to money funds, and the Treasury Department implemented an insurance program that essentially all money market funds participated in. These actions stabilized the market and restored confidence in money funds.

Separating Institutional Prime Funds

After the GFC, regulators required fund sponsors to separate institutional prime1 and municipal money market portfolios from funds for individual investors. The goal was to insulate individual investors in mutual funds from major selling by institutional investors.

"The money market fund regulations implemented after the GFC performed well in the March sell-off…"

In an additional post‑GFC measure to avoid runs on money market portfolios, funds that invest in nongovernment securities must now maintain at least 10% of their assets in instruments that can be liquidated in one day and an additional 20% in securities that can be liquidated in seven days. If a fund breaches these minimum liquidity levels, it can implement fees on redemptions or “gates” to temporarily stop them. Gates work something like stock market circuit breakers in that they are designed to slow redemption momentum. T. Rowe Price money market funds have maintained exposure to liquid assets, as defined above, well above the regulatory minimums noted and have never enacted redemption fees or gates.

Fed Steps in Again in 2020

Amid the liquidity crunch across financial markets in March 2020, the commercial paper2 market essentially froze. This triggered fears that many prime money market funds would breach their minimum levels of liquid assets and impose redemption fees or gates. On March 17, the Fed announced that it would buy highly rated commercial paper, which helped free up liquidity in that market. 

Days later, the Fed launched the Money Market Mutual Fund Liquidity Facility (MMLF) by adapting a program from 2008 to lend money to securities dealers to purchase money market instruments. The MMLF succeeded in bolstering confidence in money market liquidity. The Fed’s ability to take a money market backstop (or support) from the GFC essentially “off the shelf” and quickly re‑implement it illustrates how lessons learned then can be applied to the current crisis. Along similar lines, we believe the Treasury Department could also opt to restart a money market fund insurance program if needed.

Money Funds Positioned for Ongoing Stability

The money market fund regulations implemented after the GFC performed well in the March sell‑off, although the recent financial stress stemmed from a lack of liquidity, not from credit problems as in 2008. In theory, the minimum liquidity levels now required of money market funds could have resulted in some institutional funds instituting fees or gates on redemptions as the market froze, but the Fed’s quick action helped support the market. We believe that the money fund industry has emerged from the worst of the current crisis in good position for ongoing stability as a result of post‑2009 regulations and aggressive central bank support.

What we’re watching next

The Treasury Department will need to increase its issuance of debt across all maturities to fund the government’s massive fiscal stimulus programs designed to help cushion the impact of the coronavirus pandemic on the U.S. economy. While the Treasury Department may prefer to lock in low interest rates by issuing longer-term bonds, we expect a significant boost in the supply of Treasury bills, which have maturities of 12 months or less.

1 Prime money market funds can hold instruments with credit risk.

2 Unsecured debt issued by companies to fund short‑term obligations.

The following risk language applies to the T.Rowe Price Money Market Funds:

Retail Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. 

Government Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

Institutional Funds: You could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

Important Information

Call 1-800-225-5132 to request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information you should read and consider carefully before investing.

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., distributor.

© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.

Dismiss
Tap to dismiss

Manage Subscriptions

Unsubscribe All
OK

Manage your watched Funds and Insights subscriptions from the mobile menu.

Mobile Watchlist Menu

Manage your watched Funds and Insights subscriptions here.

OK

Change Details

Congratulations! You are now registered.

Begin watching and receiving email updates for:

Ok

Sign in to manage your subscriptions and watch list.

Register

Download

Latest Date Range
Download Cancel

This content is restricted for Institutional Investors use only. We were not able to validate your status as an Institutional Investor with the information you provided at registration.

Please contact the T. Rowe Price Team with questions or to revise your status.

1-800-564-6958

You will need to accept the Terms & Conditions again.

Ok

You have updated your email address.

An activation email has been sent to your new email address from T. Rowe Price.

Please click on the activation link in order to receive email updates.

Ok

You have an existing account

Click OK to view your subscriptions and watch list.

OK

Confirm Cancel