Update at a Glance
October 22, 2008
Investing Through the Liquidity Crisis
The 2008 liquidity crisis has tested historical norms around short-term investing. Investors are witnessing the sub-prime mortgage debacle and the resulting ripple effects throughout the short-term fixed income markets. And, while treasury and other short-term investors have historically viewed money market mutual funds as safe havens in which to invest their excess liquidity, one well-known money fund recently 'broke the buck' and several others experienced liquidity difficulties.
Are money market investments really safe and exactly what does the future hold?
No longer is it good enough for most investors to view a AAA rating on a money fund as the sole means of assurance. Management of many treasury departments has mandated the performance of in-depth due diligence and monitoring of specific money fund holdings. Fund families and other intermediaries are being flooded with inquiries around the safety of money funds and the specific holdings of these vehicles.
Over the past decade, many treasury investors have turned to Web-based investment portals to conduct investments in money funds and other instruments such as commercial paper. Portal investors have enjoyed the benefits of time savings, enhanced compliance, and competitive returns all on one consolidated Web-based platform.
The market's current liquidity predicament further illustrates the power of an investment portal offering information "on demand" and a wide selection of investment choices. Some investment portals have proven very useful in facilitating investors' research by posting recent fund holdings, sub-prime/ SIV statements, fact sheets, prospectuses and other useful information directly on the portal.
In addition to online information, investment professionals, who are assigned to clients by some portal providers, continue to prove instrumental in assisting clients with due diligence around sub-prime/SIV exposure and general information regarding the liquidity crisis and how it's impacting the financial markets. For investors choosing to change their fund investments as a result of the liquidity crisis, an investment portal executes the move between funds in seamless fashion with a few clicks of the mouse.
Read our expanded article on this topic at http://www.mellon.com/cashmanagement/newsletter/2008q1/liquiditycrisis.pdf. For more information, call us at 1 800 424-3004 (Option 2) or
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Money Markets Funds: Money market fund 7-day yield performance represents past performance, which is no guarantee of future results. Yields may fluctuate. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund, so shares may be worth more or less than original cost upon redemption. Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. Investors should receive a prospectus that contains this and other information about the fund, and are advised to read it carefully before investing. The following factors, among many, could reduce any one fund's income level and/or share price: interest rates could rise sharply, causing the value of the fund's investments and its share price to drop; interest rates could drop, thereby reducing the fund's yield; any of the fund's holdings could have its credit rating downgraded or could default; there are risks generally associated with concentrating investments in any one industry; and the risk that a counterparty in any agreement could fail to honor the terms of its agreement. A fund's yield will fluctuate as the short-term securities in its portfolio mature and the proceeds are reinvested in securities with different interest rates.
Commercial paper: Commercial paper, an unsecured, short-term debt instrument, is not usually backed by any form of collateral, although there may be back up lines of credit or back up liquidity. Simply because any particular commercial paper is rated, or has back up facilities, doesn't mean that there may not be a default. General factors affecting the commercial paper market may also result in the disruption of backup lines of credit or liquidity facilities. Credit ratings are only indicative of a rating agency's evaluation of the likelihood of timely payment of the principal of or interest. The value of commercial paper may be subject to credit market volatility, which may impact yields, and longer term notes may be subject to market factors over such longer terms.
T Bills and Discount Notes: Not all obligations of the U.S. government or its agencies and instrumentalities are backed by the full faith and credit of the U.S. Treasury. Some obligations, such as those issued by the Student Loan Marketing Association and the Federal Home Loan Banks, are backed only by the credit of the issuing agency or instrumentality, and in some cases there may be some risk of default by the issuer. In addition, because many types of U.S. government securities trade actively outside the US, their prices may rise and fall as changes in global economic conditions affect the demand for these securities.