What kinds of market conditions could cause a loss of principal in a MMA?

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RobZ
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What kinds of market conditions could cause a loss of principal in a MMA?

Post by RobZ » Thu Nov 29, 2018 7:11 pm

Is there a scenario that could cause a loss of principal in a money market account? E.g. SPAXX

lack_ey
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Re: What kinds of market conditions could cause a loss of principal in a MMA?

Post by lack_ey » Thu Nov 29, 2018 7:22 pm

That's a ticker symbol for a money market fund, which is not the same thing as a money market account. The latter product offered by a bank would be FDIC insured like a savings account.

Fidelity Government Money Market (SPAXX) is safer than some other money market funds because its holdings are issued by U.S. government entities or are backed by such debt. As we saw in the financial crisis, money market funds investing in commercial paper, bank CDs, and other debt that carries some more credit risk can be burned if some of the issuers get in trouble (like the Reserve Primary Fund had issues when Lehman collapsed), perhaps with a major financial crisis. These money market funds can yield more for a reason (they're riskier, even if normally and for decades they chug along with no issue).

There are scenarios where some of the government issuers could default or some of the debt could get devalued sufficiently such that SPAXX would break the buck and lose value down to $0.99 or otherwise have issues. But it's hard to say exactly what those conditions would be. The government could default but probably won't in any material way. They have the option of effectively ramping up inflation and/or printing more money. So this may have as much to do with politics and policy as market conditions. Or maybe under some incredible stress, some of these federal agency issuers could default on some debt and not have the Treasury bail them out.

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nisiprius
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Re: What kinds of market conditions could cause a loss of principal in a MMA?

Post by nisiprius » Thu Nov 29, 2018 9:36 pm

As far as I know, it has happened exactly once. It was during the global financial crisis, and it happened to the Reserve Primary Fund, one of the biggest and oldest of all money market funds (perhaps the oldest?). On September 16, 2008 it acknowledged that due to imprudent investments that were affected by the financial crisis, it didn't actually have $1.00 backing for each share of the fund, which precipitated a collapse of the fund. People whose money was invested in the fund eventually got back almost all of their investment, something well over $0.99 on the dollar, but there were many months during which their accounts were frozen and their money was inaccessible, and they got it back in dribs and drabs after every court session, and the whole process took more than two years.

I don't think you can point to any specific market conditions, this kind or that kind, except to say really bad conditions like the global financial crisis. Instead of looking at "market conditions," it is probably more fruitful to look at the individual money market fund you're interested in, and their management itself.

"MMA" is sometimes an abbreviation for a bank product, a so-called "money market deposit account." These have nothing to do with the money market or with money market funds. More formally they are "money market deposit accounts." They're just a kind of bank savings account that pays slightly higher interest and has slightly restrictive withdrawal rules. They are almost always FDIC insured, and if so are just as safe as any other FDIC-insured account. The chances of the FDIC needing to rescue them can be judged by looking up the bank's own rating at a place like bankrate.com.

They were called "money market deposit accounts," a misleading name which I hate, because originally the idea was that certain interest rate caps then in effect were lifted or modified in order to let them pay interest that was competitive with actual money market mutual funds.
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RobZ
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Re: What kinds of market conditions could cause a loss of principal in a MMA?

Post by RobZ » Thu Nov 29, 2018 10:08 pm

Nispirius, and Lack_ey, thank you both! That was exactly what I was confused about and didn't understand.

Zigma
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Re: What kinds of market conditions could cause a loss of principal in a MMA?

Post by Zigma » Thu Dec 06, 2018 10:04 am

I am under the impression that in case of a massive global banking collapse, the Dodd-Frank banking reform will cause a bail-in wherein Bank Deposits and money market accounts and/or funds can be frozen to bail-in bigger banks. Too complicated but that’s how I understand it. The question is how likely is a global banking collape?
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