New ICI Research Examines Money Market Funds’ Pricing

By Rochelle L. Antoniewicz and Sean S. Collins

January 25, 2011

Today, we released new research, Pricing of U.S Money Market Funds. This paper starts by explaining how U.S. money market funds seek to maintain a stable $1.00 per share net asset value (NAV). The NAV is the price at which investors purchase or redeem shares.

The paper examines several factors that can impact money market funds’ per-share market values, known as “shadow prices.” (The report uses the terms “shadow price” and “per-share market value” interchangeably.) A money market fund can report a stable $1.00 NAV if its shadow price remains within one-half cent ($0.0050) of $1.0000—in other words, from $0.9950 to $1.0050. 

Shadow prices have been disclosed to investors on a semi-annual basis for decades, but next Monday the SEC will begin publishing a monthly snapshot of shadow price data with a 60-day lag. In light of these new disclosures, here are a few key points from our work:

  • Shadow prices of money market funds can deviate from $1.0000, even when financial markets are largely stable. Such deviations are typically small and are not generally a cause for investor concern.
  • Large, sudden changes in market conditions are necessary before a money market fund is at risk of “breaking the dollar” (meaning having its per-share market value rise above $1.0050 or fall below $0.9950).
  • Such changes in market conditions—such as large, sudden changes in interest rates or large investor net redemptions—are rare.
  • Historical data show that the range in which money market funds’ shadow prices move is generally narrow.

The paper goes into depth on these findings and more. We’ve also put information in an FAQ format that you might find useful.

We co-authored the report with our colleagues Michael C. Breuer; ICI Assistant Economist; and Brian K. Reid, ICI Chief Economist. Kimberly A. Lunde, ICI Research Associate, helped with research.

Rochelle L. Antoniewicz is a Senior Economist at ICI. Sean S. Collins is ICI’s Senior Director of Industry and Financial Analysis.