“The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs,” the Fed said on Tuesday.
Short-term money market funds, generally considered to be conservative investment vehicles, have struggled in recent weeks as redemptions have risen in the face of the credit crisis.
On September 24, Putnam Investments closed and liquidated its $12.3 billion Putnam Prime Money Market Fund after “it experienced significant redemption pressure” according to a statement by the company. The fund feared that satisfying the redemption requests risked the fund “breaking the buck,” or falling below $1.00 in net asset value.
The New York-based Reserve Primary fund, another money market mutual fund, broke the buck on September 16 due to its exposure to Lehman Brothers commercial paper.
The Fed’s move was met with a plunge in short term borrowing rates, as the composite of offered levels for A1+/P1/F1+US commercial paper programs tumbled to 1.92 on October 22. This rate was 4.30 on October 9.