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What are money market funds?
That's a question all risk-averse savers sitting on a savings account with its meager returns, or on a CD with its withdrawal penalties, should be asking themselves if they're looking for a liquid investment with better returns.
In such a low-interest-rate environment, it can be difficult to reconcile both of these financial goals. And while money market funds and money market investments are also subject to lower interest rates, they are at least higher than those you'll receive in an abysmally low-interest-bearing savings account.
You see, money markets are comprised of highly liquid, short-term, low-risk securities that the U.S. government and large, stable firms use to finance themselves. At the same time, large companies warehouse cash holdings in them, while insurance companies and pension funds use them as a source to draw upon when payouts come due.
Money markets have existed for a long time as a way for large companies to finance themselves in the short term and for the U.S. government to meet funding needs as it awaits tax revenue.
But they didn't gain popularity until the 1970s. In 1971, the first money market fund, the "Reserve Fund," was started up by Bruce R. Bent and Henry B.R. Brown.
As 1970s-era stagflation began to ramp up and U.S. Federal Reserve chairman Paul Volcker pushed interest rates up over 20%, investors pulled out of traditional savings accounts, which were constrained by Regulation Q of the Glass-Steagall Act in the amount of interest they could pay on deposits, and into higher-interest-bearing money market funds.
But what are money markets comprised of and who are the big players in this huge market?
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