Thursday, January 29, 2009

Money Market Rates Reach 0%. What's Next?

Last week, I mentioned that TD Ameritrade was paying 0.00% APY interest on funds in its Money Market Sweep account. (See Money Market Rates) TD Ameritrade is not alone. Here is a recent screen capture that I took from the E*TRADE website:


The table shows that E*TRADE's nominal interest rate for three of its money market funds is actually negative. With waivers, the interest rate is 0.00%. Note that these are the rates paid by E*TRADE Brokerage in their cash sweep accounts; it is not the same as the 3.01% rate that E*TRADE Bank offers for their FDIC insured bank accounts.

And here is a screen capture that I took from the TD Ameritrade website:



At this point, the next question that comes to mind is "Can interest rates on money market funds go negative?" I'm here to tell you "Yes, they can!" Indeed, you can actually lose money in a money market fund. I will note that each money market fund has a disclaimer that looks something like this:

An investment in any money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investments at $1.00 per share, it is possible to lose money by investing in the fund.


Essentially, the brokerages are saying that you are taking a potential risk by putting your uninvested cash in a money market fund vs. an FDIC insured bank account. And they are paying you nothing (and actually penalizing you) to take that risk. That said, I am in the process of moving my money to safer FDIC insured investments.

DC

1 comment:

Monevator said...

Interestingly, I just blogged the same thing happening in the UK:

http://monevator.com/2009/01/30/zero-interest-rate-era-arrives-early-for-td-waterhouse-customers/

What's next? Well I don't think even notoriously cheap broking accounts would dare risk negative interest rates on uninvested cash. I guess if they still need/want more income, fees will have to rise.