The Federal Reserve said it will make loans to financial institutions that buy shares in “prime” money market mutual funds. Those funds invest in non-U.S. Treasury debt, including short-term bonds issued by corporations to fund their cash-flow needs. It’s the latest move by the Fed to prop up the U.S. financial system as the fallout from the coronavirus pandemic continues to run roughshod over the economy. Part of the goal is to help money market funds meet demands for redemptions by households and other investors.
“The Fed is doing all it can to make sure the system’s plumbing is working,” said Mike Hennessy, founder and CEO of financial advisory firm Harbor Crest Wealth Advisors in Fort Lauderdale, Florida, in this CNBC article. “We need to avoid a situation where issuers can’t access liquid short-term capital and investors fear their cash could lose value,” said Hennessy, who previously was a trader and portfolio manager at BlackRock.
For companies, the short-term debt they borrow from investors through prime money market funds may serve as an important source of cash flow to cover operations, such as payroll, said Hennessy, CFA, CFP®. Generally speaking, if investors in prime funds pull assets en masse for their own cash needs, the funds may be unable to buy bonds from the companies that are issuing them. “Corporations issue liabilities that these funds buy — that’s their oxygen,” Hennessy said.
“The Fed’s backstop is supportive, undoubtedly,” Hennessy said. “It allows you to have peace of mind that the money you have in a money market fund is indeed stable.”
Read the full March 2020 CNBC article "The Fed is propping up money market funds. Here’s what that means for investors" here.
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