Money Market Fund - Breaking The Buck

Breaking The Buck

Money market funds seek a stable net asset value, or NAV (which is generally $1.00 in the US); they aim never to lose money. If a fund's NAV drops below $1.00, it is said that the fund "broke the buck".

This has rarely happened. Up to the 2008 financial crisis, only three money funds had broken the buck in the 37-year history of money funds.

It is important to note that, while the funds are managed in a fairly safe manner, there would have been many more failures had not the companies offering the money market funds stepped in when necessary to support the fund and avoid having the funds "break the buck". This was done because the expected cost to the business from allowing the fund value to drop -- in lost customers and reputation -- was greater than the amount needed to bail it out.

The first money market mutual fund to break the buck was First Multifund for Daily Income (FMDI) in 1978, liquidating and restating NAV at 94 cents per share. An argument has been made that FMDI was not technically a money market fund as at the time of liquidation the average maturity of securities in its portfolio exceeded two years. However, prospective investors were informed that FMDI would invest "solely in Short-Term (30-90 days) MONEY MARKET obligations." Furthermore, the rule which restricts the maturities which money market funds are permitted to invest in, Rule 2-a7 of the Investment Company Act of 1940, was not promulgated until 1983. Prior to the adoption of this rule, a mutual fund had to do little other than present itself as a money market fund, which FMDI did. Seeking higher yield, FMDI had purchased increasingly longer maturity securities and rising interest rates negatively impacted the value of its portfolio. In order to meet increasing redemptions the fund was forced to sell a certificate of deposit at a 3% loss, triggering a restatement of its NAV and the first instance of a money market fund "breaking the buck."

The Community Bankers US Government Fund broke the buck in 1994, paying investors 96 cents per share. This was only the second failure in the then 23-year history of money funds and there were no further failures for 14 years. The fund had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating rate securities lost value. This fund was an institutional money fund, not a retail money fund, thus individuals were not directly affected.

No further failures occurred until September 2008, a month that saw tumultuous events for money funds. Though, as noted above, other failures were only averted by infusions of capital from the fund sponsors.