Money Markets With Negative Returns

Investors fleeing to the safety of treasuries and money markets funds may have to reevaluate their choices, as the meaning of “safe” is rapidly changing.

Yesterday at a Treasury auction, interest rates on 4-week T-bills dropped to zero. Other than getting their money safely parked in U.S. assets, a purchaser receives no return. You can’t really call these purchases investments anymore, as they have no potential for gain.

These auctions set the price that buyers are willing to pay. And as prices are bid up, the rate of return drops. But a Federal Funds rate of zero might not be that far off. While the target rate is currently 1%, the effective rate has been much lower. And this creates an interesting problem.

If interest rates are cut to zero, the return on U.S. Treasury money markets could become negative. After management fees and other expenses, a zero percent return could lead to investors losing money in these funds.

Money markets are an enormous psychological bellwether for safety of principle. While not “breaking the buck,” a negative return on these assets could have major implications on investor confidence.

It’ll be interesting to watch the price of gold as the yields from money markets and Treasuries bottom out. Last Friday we looked at how gold has been largely ignored as a typical “safe-haven” in this market. If interest rates go lower, gold should start to climb.

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