afan wrote: ↑Sun Mar 26, 2023 11:04 am
Note that Treasury money market funds for the most part do not invest directly in Treasurys. Much of the money is in repurchase agreements collateralized by Treasurys. In principle, the collateral should support the value if the seller defaults on the agreement. But holding this is different than directly owning the Treasury security. The US does not guarantee the value of the repurchase agreement.
The value of the securities is also exposed to interest rate risk. If there is a spike in rates, then the value of the shares can go down. As others have noted, the SIPC does not provide any protection against this.
For these reasons, an FDIC-insured bank account is safer than a money market fund, even a Treasury money market fund. The risk of a Treasury fund is low but not zero.
If your FDIC-insured bank goes under, it usually gets taken over during the weekend and by Monday morning things should be normal.
If you have more than the insured amounts, then it is unclear whether the government will guarantee the excess. Right now the answer appears to be "maybe." With it depending on the assessment by the Treasury Secretary at the time.
Many people cheerfully accept the low risk in a federal or Treasury money market fund in return for a higher yield than available from an FDIC-insured bank account.
There is interest rate risk in a bank account.
If rates fall, your US Treasury may rise in value, your checking account will not.
So you have a relative loss of value compared to if you had bought US Tsy securities.
And saying the US does not guarantee repos is simply nonsense.
A fund lends out it's cash and received a US Tsy in return.
Should they not get back the cash, they sell the US Tsy and receive cash.
Repos are no different than owning US Tsy securities from the standpoint of credit risk.
Either way you hold a US Tsy, with the mere technicality of who legally owns the US Tsy.
A mutual fund physically takes possession of the US Tsy security collateral, and has legal right to keep it if
the repo counterparty does not fullfil their obligation and return cash invested by the mmkt fund.
I worked in the industry, both for a major bank and multiple fund managers.
I wouldn't hesitate to put any amount of money in a Vanguard or Fidelity gov/federal mmkt fund, repos or not.
I think it prudent to keep some cash in multiple checking accounts to pay bills for the next few weeks/months.
There are many ways one can temporarily lose access to a bank or brokerage of fund account.
Besides defaults, your internet access can be frozen, their systems can be down, there can be fraudulent transactions
(though this far more likely at a bank than a brokerage without cash management features like Vanguard).
But as far as the bank failure scenario that so many worry about now, your money is just as safe and liquid in a good mmkt fund, no caveat.