The Money Market and Your Financial Plan

The $7 trillion United States money market is a vast collection of short-term debt instruments typically traded wholesale. Money market securities are more so suitable to help provide for intermediate savings goals, as part of your financial plan. Still, all asset classes introduce distinct risks to your portfolio, irrespective of safety of principal.

Credit Securities

Money market securities are debt obligations with maturities of less than one year. The money market effectively facilitates short-term lending and borrowing, between investors, corporations, financial institutions, and sovereign governments. Here, savers collect interest, in exchange for putting up working capital for institutional operations. Money market securities include treasury bills, certificates of deposit (CDs), commercial paper, banker’s acceptances, Eurodollars, and repurchase agreements. The wholesale money market is limited to institutions that transact business at $5 million to well over $1 billion at a time. Smaller, retail savers may tap into this market through money market mutual funds and deposit accounts held at banks.

Interest Rates and FDIC Insurance

Money market interest rates move in lockstep with the overnight lending rate and monetary policy. Short-term CDs and money market deposit accounts are backed by FDIC insurance coverage, which guarantees $250,000 per depositor, per bank. Money market deposits offer higher rates relative to savings accounts, with savers agreeing to limited withdrawals, while also maintaining higher minimum balances. Money market mutual funds price out at $1 NAV, with interest being paid out as dividends. Here, possibilities for “breaking the buck” are all but nil. In 2008, Reserve Fund investors ultimately received 99 cents on the dollar through the depths of the Great Recession. Expect minimal investment returns out of the money market.

Financial Strategy

Money market securities are in record high demand through the post COVID era, with the Federal Reserve driving rates higher to combat inflationary risks. The federal funds rate is now 4.5%, with some money market funds now paying out 5%. Warren Buffett, for his part, now carries more than $300 billion in cash and equivalents on the Berkshire Hathaway books, apparently priming the pump for recession.