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. Airbag maker Takata bankruptcy filing expected in Japan, U.S.


    DETROIT — Japanese airbag maker Takata Corp. has filed for bankruptcy protection in Tokyo and the U.S., overwhelmed by lawsuits and recall costs related to its production of faulty air bag inflators.

  2. Federal agencies demand records from SeaWorld theme park


    ORLANDO — Two federal agencies are reportedly demanding financial records from SeaWorld.

    Killer whales Ikaika and Corky participate in behaviors commonly done in the wild during SeaWorld's Killer Whale educational presentation in this photo from Jan. 9. SeaWorld has been subpoenaed by two federal agencies for comments that executives and the company made in August 2014 about the impact from the "Blackfish" documentary. 
[Nelvin C. Cepeda/San Diego Union-Tribune/TNS]
  3. Legalized medical marijuana signed into law by Rick Scott

    State Roundup

    TALLAHASSEE — Gov. Rick Scott on Friday signed into law a broader medical marijuana system for the state, following through on a promise he made earlier this month.

    Gov. Rick Scott signed legislation on Friday that legalizes medical marijuana in Florida.
  4. Line of moms welcome Once Upon A Child to Carrollwood


    CARROLLWOOD — Strollers of all shapes and sizes are lined up in front of the store, and inside, there are racks of children's clothing in every color of the rainbow.

    At Once Upon A Child, you often as many baby strollers outside as you find baby furniture and accessories. It recently opened this location in Carrollwood. Photo by Danielle Hauser
  5. Pastries N Chaat brings North India cuisine to North Tampa


    TAMPA — Pastries N Chaat, a new restaurant offering Indian street food, opened this week near the University of South Florida.

    The menu at Pastries N Chaat includes a large variety of Biriyani, an entree owners say is beloved by millions. Photo courtesy of Pastries N Chaat.