The most obvious and immediate casualty of the Lehman collapse was thefall of Reserve Primary, and with it, the Prime Money Market - Money Market funds investing in commercial paper such as that issued by banks.
The collapse is strikingly evident in the below graph, produced by Bank of America analysts using Fed data. The red-line shows the implosion of the Prime MMF market as investors redeemed funds.
Equally striking though is the slow recovery of that market. Large US banks are more or less guaranteed not to fail now. The full faith and credit of the US government is implicitly behind them. Against that too, bank CP yields are high. What’s not to like?
Furthermore, the move towards zero interest rates should all but destroy Treasury Money Market funds - the yield on the short-term Tbills they invest in is simply too low to sustain their business model. (Tangentially, the Fed moved to cut the minimum security yield it will accept in its emergency money market fund backstop facility, the MMIFF as a result)
So will the decline in attractiveness of Treasury yields precipitate a shift back for MMFs into the CP-based market?
Possibly. Or possibly also Money Market Funds in general have been spotted for what they are: very basic maturity transformers; very vulnerable to liquidity crises.
Related links:
Of money market funds and treasuries - FT Alphaville
How low rates break the buck - FT Alphaville
