Investors pull out of money market funds as guaratee ends

BOSTON (Reuters) - Investors stepped up their withdrawals from money market funds this week days before a federal guarantee to safeguard their assets expires on Friday, industry data show.

A trader counts his money on the floor of the New York Stock Exchange October 7, 2008. REUTERS/Brendan McDermid

The outflows could sharpen scrutiny of how to regulate the funds, which now hold $3.5 trillion despite paying almost no interest of late.

Investors took out a total of $55 billion from money market funds on Tuesday and Wednesday, far more than usual, Peter Crane, president of fund-watcher Crane Data LLC, said in an interview.

“There’s a glimmer of evidence that there is money leaving because of the end of the guarantee,” Crane said.

Still, Crane and other industry analysts said they do not expect panicked withdrawals since investors have had months to prepare for the end of the insurance program.

“I think that folks who wanted out of money funds have already taken their cash and put it elsewhere,” said Connie Bugbee, managing editor of iMoneyNet, another research firm.

Money funds traditionally invested in super-safe debt instruments and paid little interest. The average stock mutual fund has earned 21.92 percent since January, the top money funds’ 7-day yields were all around 50 basis points, according to Crane’s web site

But the money funds have drawn much attention since last year after Reserve Primary Fund “broke the buck” or saw its assets fall below the traditional $1-per-share level because of its big stake in Lehman Brothers Holdings.

To prevent runs on these vehicles, the Treasury Department said it would guarantee deposits on these funds made before September 19 of last year if they fell below $1 a share. The program was one of many emergency federal program aimed at stabilizing markets last year and was widely supported by fund companies.

But the event also led to reviews of money funds in general. In June, the U.S. Securities & Exchange Commission proposed rule change such as requiring money funds to hold shorter-term securities of higher quality.

The industry has pressed back in some areas. In particular it opposes the idea of allowing the funds’ net asset values to stray from $1 a share, which some say makes them too inflexible and can scare investors.

According to Crane and iMoneyNet, money funds held just under $3.5 trillion as of September 15, down from a peak of $3.9 trillion in mid-January. Crane and Bugbee said they expect steady outflows from the funds as investors continue to move to stocks and bonds, to as little at $3.1 trillion next year, Crane said.

Among the largest money fund operators are Fidelity Investments and Federated Investors. Federated executive vice-president Deborah Cunningham said it hasn’t seen unusual outflows this week but noted it mainly serves institutional investors rather than retail customers. But the program was a good one for its time, she added.

“The fact was, it provided a huge amount of confidence in the marketplace when that confidence was not there,” she said.

Editing by Gary Hill