Tahoe-Truckee Market Beat: Breaking the buck
February 23, 2016
The term "breaking the buck" is one you may have heard in the financial press lately. Breaking the buck means that a money market fund has dropped below the one-dollar mark.
Money market funds are considered to be very safe investments found within all fund mutual fund families and available within 401k plans and other qualified retirement plans. Money market funds pay a very low rate of return, but are supposed to be safe. If they "break the buck," it means investors could lose money in those funds.
At her recent Congressional testimony, Fed chair Janet Yellen indicated that negative interest rates could be on the table. The Fed considered negative interest rates in 2010 but concluded that they may not be legal and dropped the idea. Yellen told Congress that negative rates could be under consideration once again by the Fed.
Europe and Japan have already been using negative interest rates as a stimulus tool. One negative implication of negative interest rates is that some money market funds could break the buck causing losses for their investors.
Another potential loser if the Fed decides to try a negative interest rate policy could be the banks. Bank profitability could plummet under a negative rate policy as they would lose money on their reserve deposits at the Fed and it would put a further squeeze on their loan profits.
Companies with defined benefit pension plans could also be hard hit. Defined benefit plans use a discount rate to estimate their future payments to plan participants.
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A negative rate environment would have a serious impact on their profits as they would have to subsidize those retirement plans from their cash flow, thereby reducing their earnings.
Some investors have already experienced negative rates of return in the last few years. Short and intermediate term TIPS, or Treasury inflation protected bonds, have had negative rates of return since 2011. The longer-term 20-year TIPS have had returns near zero.
Gold could be a possible winner with a negative rate policy as investors seek out safe havens. Gold is up about 18% year to date, but its price is highly cyclical. Gold hit its all-time high price in 2011 and fell about 40% after that peak.
Janet Yellen said that negative rates were under discussion, but did not say they would be implemented; hopefully, the Fed will never adopt a negative rate policy.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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