The U.S. Treasury Department today announced the establishment of a temporary guarantee program for the U.S. money market mutual fund industry.

For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund — both retail and institutional — that pays a fee to participate in the program. The program will have up to US$50 billion to guarantee the funds.

Treasury says that concerns about the net asset value of money market funds falling below US$1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets. “In turn, these pressures have caused a spike in some short term interest and funding rates, and significantly heightened volatility in exchange markets. Absent the provision of such financing, there is a substantial risk of further heightened global instability,” it said.

“This action should enhance market confidence and alleviate investors’ concerns about the ability for money market mutual funds to absorb a loss. Investors in money market mutual funds with a net asset value that falls below US$1 would be notified that their fund triggered the insurance program,” it added.

Additionally, the U.S. Federal Reserve Board announced two enhancements to its programs to provide liquidity to markets. One initiative will extend non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper from money market mutual funds. The Fed said this should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP markets and broader money markets.

The Fed also plans to purchase from primary dealers federal agency discount notes, which are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

IE