Make us your home page

Ultrashort bond funds an alternative to money market funds

A growing number of investment firms have begun offering ultrashort-term bond funds, which may become an alternative to the traditional money market fund.

There are now close to 50 ultrashort bond funds, with seven of them introduced last year, according to Morningstar Inc.

Ultrashort bond funds generally invest in government and corporate securities that have slightly more risk — and thus a slightly higher yield — than a money market fund. But the average maturity of these securities also is less than those of a typical bond fund, so ultrashort funds will be less affected by interest rate changes. Though rates have been at historical lows, many analysts don't expect them to remain low for long. In May, the yield on the 10-year Treasury note rose by about half a percentage point.

Among recent arrivals, the T. Rowe Price Ultra Short-Term Bond Fund launched in December and has $175 million in assets. Legg Mason Inc.'s California subsidiary last month filed to register the Western Asset Ultra Short Obligations Fund with regulators.

Some fund experts say companies are offering ultrashort-term bond funds as an alternative for risk-averse investors fed up with the low rates offered by money market funds. But others say companies also are gearing up for possible regulatory reforms that could make money market funds less attractive.

For decades, investors have parked cash in money market funds, considered the safest investment for preservation of principal outside an insured bank account. Such funds aim to maintain a $1 per share price.

But some money market funds several years ago started holding riskier securities to boost yields — a strategy that blew up on them in the 2008 financial crisis and caused investors in the oldest money market fund to lose money.

The Securities and Exchange Commission has proposed eliminating the fixed $1 share price on certain money market funds that can lead investors to believe the funds never lose value. Under the proposal, the share price would go up and down with the value of the securities held by the money market fund, the same as with mutual funds.

It's unclear when or what the SEC will decide about money market funds.

Russ Wermers, associate professor of finance at the University of Maryland-College Park's Robert H. Smith School of Business, said fund companies aren't waiting to find out. They are preparing for potential reform by introducing ultrashort-term bond funds as an alternative to money market funds, he said.

"Without the fixed (net asset value) benefit, investors may see little reason to invest in something with such a low yield," he said.

The Securities and Exchange Commission reportedly is weighing a proposal to eliminate the fixed $1 share price that can lead investors to believe that money market funds never lose value.

Ultrashort bond funds an alternative to money market funds 06/16/13 [Last modified: Sunday, June 16, 2013 7:05pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Tribune News Service.

Join the discussion: Click to view comments, add yours

  1. Appointments at the Tampa Metropolitan Area YMCA and the Straz Center highlight this week's Tampa Bay business Movers & Shakers



    The Tampa Metropolitan Area YMCA has named Matt Mitchell its new chief executive officer, effective Oct. 16. Selected by the Y's CEO Search Committee following a five-month search, Mitchell will succeed Tom Looby, who is retiring. Looby has served the Y Movement for 37 years, the past 10 …

    The Tampa Metropolitan Area YMCA has named Matt Mitchell as its new Chief Executive Officer. [Handout photo]
  2. Rep. Larry Ahern gets roughed up by Clearwater City Council

    State Roundup

    It seemed innocuous enough: an "end of session report" from state Rep. Larry Ahern, R-Seminole, to the Clearwater City Council.

    Then Ahern got taken to the woodshed.

    Rep. Larry Ahern is vying for a seat on the Pinellas commission.
  3. There's a bar in Tampa where you can roller skate and eat sushi

    Food & Dining

    Roller skating, it's not just for kids birthday parties and the 1970s anymore.

    The exterior of Pattinis features this mural by Art Aliens! [Pattinis South Tampa via Facebook]
  4. Lockdown: Florida's 97,000 prison inmates confined through weekend

    State Roundup

    All of Florida's 97,000 state prison inmates are on lockdown — and will remain confined to their dorms at least through the weekend — in response to unspecified threats about possible uprisings, officials from the Florida Department of Corrections confirmed Thursday.

    Blackwater River Correctional Facility. [Florida Department of Corrections]
  5. Carnival announces five more cruises from Tampa to Cuba


    TAMPA — Carnival Cruise Line is adding five more cruises from Tampa to Cuba in 2018, Port Tampa Bay announced Thursday.

      Carnival Cruise Line announced additional cruises to  Cuba. Pictured is its Paradise cruise ship departing on its inaugural voyage to Cuba from Tampa. | [MONICA HERNDON | Times]