Why is the 3 month bill yielding only 3 basis points?

The 3 month Bill is trading at almost zero percent. You read that...almost zero percent. Why?

Primary Reserve Fund is/was the oldest Money Market Fund in America. Yesterday they broke the buck and halted redemptions. Investors in that fund will ultimately receive less than a dollar for each dollar they put in. That is the kiss of death for a money market fund.

Preservation of principal, a modest return, and instant liquidity are the hallmarks of a money market fund. Typically a fund like this invests in very short notes and bills issued by the US Treasury and high rated commercial paper.

The investment objective of this particular fund was "...to seek as high a level of current income as is consistent with preservation of capital and liquidity". On this I would give them a 1 out of 3 as they didn't preserve capital and they are currently experiencing severe liquidity problems.

When the news hit last night I looked up their holdings and was surprised to find a money market fund holding 39% asset backed commercial paper, 18% bank/corporate commercial paper among others. I read nothing on their fact sheet about Treasuries. This fund had a lot of exposure to Lehman Brothers and they took a massive hit for it.

My understanding from speaking with traders this morning is that this fund is leading the charge into the short end of the curve. They and many other money market funds are liquidating all types of short paper and absolutely sprinting to the safety the Treasury Bills. As I type this the yield on a 3 month T Bill is 2 basis points. I'm not a math major but that appears to be awfully close to zero.

Now would be an ideal time to check the prospectus on any money market fund you have exposure to, whether offering it to customers through the bank or holding it on a personal basis. It might also be a good opportunity to speak to your public funds accounts about their money market exposure. Last year Florida was the first to experience this problem when the state run investment pool for schools and local governments was forced to halt redemptions. When that fund siezed up some schools had to take out loans to pay their teachers. If you have public fund accounts that keep money in the a state investment pool they are getting the second huge sign in a year that they need to keep on top of their money market accounts. Know whats in them, don't take the word of the state employee that runs the shop...look at the prospectus, and know that if things hit the fan they might halt redemptions. It seems like the safety of an FDIC insured bank might offer them some comfort in this market.

If you have any questions on this or if there is anything I can be doing for you just let me know.