Low interest rates - now edging back up - have proved a boon for borrowers seeking car loans and refinancing mortgages. But they've left in the lurch those who take a safe-and-steady, interest-based approach to savings.
Plunging returns. Little hope for an upswing in the near term. No wonder investors are pulling significant amounts out of money-market funds for the first time in 30 years.
"It's an ugly scenario for savers," says Peter Crane, managing editor of Money Fund Report, in Westborough, Mass.
That's because policymakers at the Federal Reserve have kept short-term interest rates at 40-year lows. Their goal is to stimulate the sluggish economy. But those low rates have dropped the average return on money-market funds from 6 percent in 2000 to 0.54 percent today.
Even in mid-1993, when the Fed was also conducting an easy-money monetary policy, money-market funds were still yielding an average of 2.7 percent.
"The Fed's monetary policy is nuts," charges Bruce Bent, chairman of The Reserve Funds, a mutual-fund company based in New York.
He says the Fed should have done more to stop the stock market's period of "irrational exuberance" in the late 1990s.
Today's slim yield on the $2 trillion sunk into some 1,000 different money-market funds in the United States provides investors an annual return of about $10 billion. The money would have returned $120 billion in 2000.
"The Fed has blown a $100 billion hole in the economy," says Mr. Crane of Money Fund Report.
It certainly has ripped a tear in the pockets of those keeping cash in money-market funds, some of them cautious elders wanting to avoid the higher risks of the stock market.
An investor with $1 million in a money-market fund would get an annual return of only $10,000 a year - that is, if he or she finds a money-market fund yielding 1 percent, twice the average.
Mr. Bent's $22 billion fund pays a mere 0.1 percent to shareholders. That, he explains, is because it buys only low-risk assets - one year or less bank certificates of deposit and debt issued by governments and their agencies. These offer lower yields than riskier commercial paper sought by many other funds.
Low interest rates also have made it more difficult for firms managing money-market funds to make a profit, especially smaller funds. Many have shrunk their fees to leave some profits over for shareholders.
A few fund groups have had to contribute from their capital to prevent the share prices from dropping below $1 - and creating a loss for shareholders.
Last month, Munder US Treasury Money Market Fund, with only $24.3 million in assets and yielding 0.01 percent, was liquidated by its trustees and the money returned to shareholders.
"No retail investor has ever lost money in a retail money-market fund," says Crane. "And we don't expect that to happen."
At the same time, the low rates have saved bundles of money for the companies, governmental agencies, banks, municipal governments, and others issuing the commercial paper, repurchase agreements ("repos"), and other short-term loans bought by money-market funds.
This year, the low yields, combined with the attraction of more vigor in the stock market, is prompting investors to take some of their money out of money-market funds. Some money, it is speculated, is going into higher-paying bank certificates of deposit, stock funds, or other investments. Some may just be used to cover expenses.
So far in 2003, money-market funds as a whole have seen their assets dwindle by 5 percent, or $100 billion, notes Crane. The days of rapid growth in assets "are long gone."
It is the first time since 1971 that money-market funds have suffered substantial losses in assets. Last year, these funds' assets dwindled a tiny amount.
It was in 1971 that Bent took advantage of a gap between the 5.25 percent banks could offer on savings accounts, a rate ceiling set by the federal government, and the 8.5 percent rate then available from Treasury bills, by launching the first money-market fund. Hundreds of others followed, creating a new financial industry and gradually reshaping the banking industry.
With today's low return on money-market funds, many investors do not consider them a real investment.
"It's a parking place, a convenience vehicle," says Donald Cassidy, a senior research analyst at Lipper Inc., a firm that tracks the performance of mutual funds.
Individuals often park money in these funds when concerned that stocks, bonds, or other investments could lose them money. Many brokerage accounts automatically sweep uninvested money of their clients into a money-market fund.
Because most money-market funds give shareholders the ability to write sizable checks on their accounts, investors also use them to pay their mortgage, tuition, real estate taxes, or other major bills from the accounts.
Corporations and other institutions employ money-market funds to handle extra monies.
"We are talking about cash management," says Bent. "They aren't [investing] to get rich. This is working capital."
More and more firms have decided in the past two years to let funds manage their cash, rather than keeping a staff of experts at corporate headquarters to examine suitable investments, notes Mr. Cassidy. By now about 50 percent of the shares in these funds belong to corporations or other institutions, twice the percentage of 10 years ago.
Commercial banks compete with the funds by providing customers with money-market deposit accounts that pay a minimal interest rate. These currently have assets of about $3 trillion, more than money-market funds. These have an advantage in that they are insured up to $100,000 by the Federal Deposit Insurance Corporation. That may partly explain the efforts of money- market-fund managers to avoid "breaking the buck." They prize their funds' strong reputation for safety and liquidity.
Crane suggests that individual investors with small amounts of money in a money-market fund are wasting their time if looking for another fund with a slightly higher yield. Making the transfer, perhaps with the money not invested for some days, will probably be barely profitable - if that.
Nor do experts expect short-term rates to rise for at least this year, probably longer. "No relief in sight," says Crane.
Those seeking a relatively safe higher yield might consider putting their money in TIPS - Treasury Inflation-Protected Securities, suggests Cassidy.