Yellen drew attention to the shadow banking industry consisting of tri-party repurchase agreement markets and
money market mutual funds, and said that these were vulnerable areas that required greater regulation.
Our recommendation: try
money market mutual funds and money market accounts.
The growth of M2 in July owed in part to a sizable increase in liquid deposits, but in light of a resumption of run-offs at bond mutual funds it also may have reflected a renewed preference by households for the protection of principal provided by
money market mutual funds. The strength in M2 showed through to M3, which also was boosted by funds garnered from wholesale sources to finance a surge in bank credit.
Companies' strategies to deal with this include pulling cash from large business checking accounts into
money market mutual funds, treasury bills and other short term investments.
The income and growth preservation model she endorses is: 50% blue-chip stocks, which she says have had a 10% to 12% average return since 1920; 40% short-term bonds, like treasuries and corporate securities; and finally 10% in "cash on hand" instruments, like
money market mutual funds and CDs.
For example, some flows into bond mutual funds were reversed; investors, fearing further rate increases and awakening to the nature of the risk they had taken on, shifted funds back into shorter-term
money market mutual funds and into deposits.
Under the agreement, nearly USD17bn in
money market mutual fund assets currently managed in nine RidgeWorth
money market mutual funds will transition to six existing Federated
money market mutual funds with similar investment objectives.
The British bank said that if
money market mutual funds were to put more cash into Treasury bills and repurchase agreements rather than bank commercial paper, US borrowing costs could increase.
The part of M3 exclusive to that aggregate declined 3 1/2 percent on a fourth-quarter-to-fourth-quarter basis, held down by a steep drop in institution-only
money market mutual funds. Overall, M3 velocity rose at a 4 1/2 percent annual rate in 1993, down almost 2 percentage points from the previous year.
In the early 1970s, when volatile stock market conditions along with persistent inflation reduced the attractiveness of bond and equity funds, the industry created
money market mutual funds. These funds met the desire of investors to benefit from money market rates, which were then above the level that federal regulation allowed depository institutions to offer on retail accounts, and the success of these funds spurred the development of other funds investing in fixed-income securities: Municipal bond funds were introduced in the mid-1970s, and mortgage-backed and government bond funds were started in the mid- 1980s.
M3 contracted slightly in June and July, owing in part to a substantial drop in institution-only
money market mutual funds, whose returns had not kept pace with the increase in money market rates in late spring.
Inflows to bond and stock mutual funds have reached record levels, and, to the extent that these inflows have come at the expense of growth in deposits or
money market mutual funds, the broad monetary aggregates have been depressed.