ADVANTAGES OF TREASURY-ONLY MONEY MARKET FUNDS

Advantage 1: Competitive yields with equivalent money markets. In recent years, Treasury-only money funds have yielded double the average yield on personal checking accounts, and when compared to a business checking account, the difference is even greater. Furthermore, in a business of fairly average activity, you should also be able to take better advantage of the float (i.e., the funds remaining in your account while checks written against them have not yet cleared).

Advantage 2: Low fees. When a bank quotes you a yield on any kind of account, it always quotes you the yield before it deducts a variety of service fees. With bank charges and fees currently very high, it’s almost impossible for most bank customers to collect anything near the advertised yield. In contrast, when a money fund quotes you its yield, it always quotes the yield after it deducts all its expenses and most of its fees. Of course, the past or current yield is no guarantee of future results. However, the yield quoted is the actual net yield that investors in the fund are earning.

Advantage 3: One account for both checking and savings. At banks, most customers divide their money between a checking account (where they give up most of their yield) and a savings account or CD (where they give up immediate access and liquidity). No matter what, it’s almost impossible to get both optimal liquidity and yield in the same bank account. In contrast, Treasury-only money funds let you keep nearly all your cash assets, whether they’re for savings or for checking, in one single account. As a result,

• You have complete access to all your funds at all times.
• You can withdraw the entire amount, with no penalty whatsoever. Just write a check or request a wire transfer, and it’s done.
• Your money consistently earns competitive current market yields.
• You never have to worry about leaving too much in your checking account at low rates. The full amount is available for checking at all times, earning full interest.
• You continue earning interest on your money up until the moment your check clears. The longer it takes for payees to cash their checks, the more interest you make on this float.
• If you want to use your account as your most active checking account to pay most of your bills, that’s even better. The more you use it, the more you take advantage of the float.
• In short, you are always getting maximum liquidity and maximum yield on your entire balance.

Advantage 4: No limit to your account size. Bank deposits are federally insured up to $100,000—but not beyond. All deposits over $100,000 are at risk, particularly in a financial crisis. So when you use banks for your savings or your checking, you may have to use a series of maneuvers to keep your money safe from failure, including

• Spreading your CDs among various accounts. This means that you would have to keep track of several accounts at the same time. 
• Making sure that your initial investment in each CD is actually under the $100,000 limit. Otherwise, the accumulation of accrued interest could put your balance over the limit, and that portion would not be covered by the FDIC.
• Calling your bank regularly to make sure (in the case of large checking accounts) that the account is not over the $100,000 FDIC limit. If there are several large checks outstanding, your bank balance could be over the limit. If the bank were to fail at that time, any excess amount could be lost.

With Treasury-only money funds, insurance is essentially a moot point because your funds are invested strictly in securities that are guaranteed directly by the full faith and credit of the U.S. Treasury Department. There is no limit on the Treasury’s guarantee of its obligations, whether you’re a beginning saver with just a few thousand dollars or a highnet- worth investor with substantial sums.

Note: There were more than 3,000 bank and S&L failures between 1980 and 2002, causing savers and businesses serious inconveniences and even outright losses. In contrast, there has never been a default on U.S. Treasury securities.

Advantage 5: Exempt from local and state taxes. The income that you earn on both Treasury-only money funds and bank accounts is subject to federal income taxes. However, when it comes to local and state income taxes, there is a difference: The dividends that you earn on Treasury-only money funds are exempt. The income that is earned on bank accounts and CDs—or on money funds that invest in CDs—is not exempt.

Advantage 6: Truly free checking. One way or another, nearly all banks charge you for your checking privileges. They may charge you a fee for each check you issue. They may charge you a flat monthly service fee. Or they may charge you a combination of both. Most Treasury-only money funds do not charge you any extra fee for checkwriting privileges. You can write as many checks as you want, as often as you want.

Advantage 7: Immediate liquidity. There are several ways you can withdraw your money from your Treasuryonly money fund: 

• You can write a check against the balance in your account to yourself or to another payee.
• You can call or send a fax to your money fund’s shareholder service department, giving it instructions to issue a wire transfer. (Before the fund can accept your wire instructions, however, you will have to file a signed authorization ahead of time. This can be done when you open your account.)
• You can request that a check be sent to you directly from the fund. You can also authorize telephone instructions for redemption by check when you open your account.

No other kind of account (e.g., one with a bank, an S&L, a credit union, a broker, or an insurer) can give you this level of immediate access. For a step-by-step guide on how best to take advantage of your Treasury-only money fund and even how to use it for low-cost do-it-yourself checking, refer to The Ultimate Safe Money Guide (Wiley).

Read More : ADVANTAGES OF TREASURY-ONLY MONEY MARKET FUNDS

Debt and money markets

If we assume therefore that the financial markets are structured into
types or categories we can begin to look at the fundamental
differences associated with each, explore the characteristics of the
markets themselves and the products, which will determine the way
in which the operations teams deal with them.

The wholesale and retail markets have different products, processes,
procedures and participants. Often the retail market utilizes a
combination of wholesale market products so that, for instance, a
guaranteed equity index bond offered to the public will utilize the
corporate bond market to give the financial return to allow the
investors’ subscriptions to be returned, and the derivatives market for
the option contract on the index to guarantee the increase in the
index value. We look at retail markets and products in more detail
later in the book. The wholesale markets and distribution businesses
of banks are constantly providing and utilizing products to satisfy the
needs of financial management and capital generation for corporate
clients and investment opportunities for institutions and private
clients.

Corporate finance teams provide services to ensure that a client can
raise funds to finance trading, research and development and use
capital to acquire other businesses as well as defend a client against
the predatory instincts of someone else. It is an often-complex
process requiring great skill in relationship management, confidentiality,
and a broad base of contacts. Raising millions of euros,
dollars or pounds may sound easy but the instrument used to achieve
this must be beneficial to both the client and the investor. Most
importantly, it must be competitive with other types of investment
opportunities and attractive. Thus we have different markets within
the financial markets, all competing for an investor’s money as they
provide the capital sources that keep industry, commerce and
governments working.

Taking debt and money markets first, we can safely assume that here
we have products which are clearly defined, i.e. they represent a debt.

However, within this category are various types of debt instruments
ranging from simple debt to a debt with conditions attached to it. In
all cases an organization is borrowing money for a period of time. In
the case of ‘debt markets’ this is usually for a period longer than 12
months. If a debt is for a shorter period of time it is often referred to
as a money market instrument.

So we have common debt instruments like bonds (or loan stocks), bills
and notes, for instance. A bond is issued by a borrower to a lender and
in its simplest form is set for a period of time and carries a fixed rate
of interest, payable at set times during the life of the bond. Then we
have redemption, the return of the principal amount (the amount
lent) and interest payments at periodic intervals, i.e. semi-annually or
annually. In common with all financial markets there is a language

that is used and it is important that this language or terminology is
understood or problems will undoubtedly occur. So when we talk
about interest on a bond we could also refer to the coupon of the
bond. Why? Well, bonds are often in bearer form and like a £10
banknote or a $1 bill whoever bears or has it in their hand owns it. If
a bond is in bearer form (Figure 2.2) then the borrower has no means
of knowing to whom the interest should be paid unless there is a
facility, in this case a coupon attached to the bond, that can be
detached, presented at the appropriate time to the paying agent of the
borrower and the interest amount received in exchange.

The alternative to a bearer instrument is a registered instrument
where a central register is kept of the owners of the instrument or
security. The issuer of a registered security always knows who owns
the debt but if the holder sells it, then the register must be updated
to reflect the change in ownership. Typically bonds will be issued
with a life or duration of anything from 3 years to 30 years or more
and, unsurprisingly, are referred to as ‘short’, ‘medium’ and ‘long’
bonds.

In operations terms the issues are about:

• The type of bond, i.e. bearer or registered
• The frequency of the interest payments
• The rate of interest
• The date of redemption or duration of the bond

Additional information will include the paying agent, method of
claiming interest and redemption amounts and whether there is any
other condition, option or action that might occur with the bond on
or before maturity.

Bonds with a predetermined rate of interest are known as fixed-rate
or fixed-interest bonds. But bonds may also be issued with a floating
or changeable rate of interest and these can be called floating-rate notes
or FRNs. The precise terms of the interest, redemption and any other

condition are decided when the instrument is issued, but exactly
what the actual amounts or actions are will be determined at the
appropriate times.
Read More : Debt and money markets

Sterlings Money Markets

The Bank of England (BoE) has had sole responsibility since 1998 for monetary policy
in the UK. Decisions on interest rates are made by the Bank’s Monetary Policy
Committee (MPC). The Bank’s monetary policy objective is to deliver price stability as
defined by an inflation target set by the UK government. The MPC sets the short-term
interest rate in pounds sterling and implements this rate through open market
operations in the sterling money market. The Bank of England is therefore functionally
independent of the UK central government. (Although in fact there is provision in the
Act of Parliament for the British Chancellor of the Exchequer to issue directives on
interest rates in an emergency.)

Transactions between banks in the UK are settled through accounts held with the
Bank of England. The open market operations of the Bank of England ensure that the
commercial banks have enough funds available to settle all transactions. The Bank
lends funds against collateral consisting of high quality assets such as:

• Treasury bills;
• gilts (UK government bonds);
• certain eligible bank bills;
• securities issued by EU governments.

The rate of interest agreed in these transactions affects the overall level of interest rates
in the UK economy.


The Bank of England’s operations are conducted with a range of major financial
institutions such as banks, building societies (mortgage lenders) and securities houses.
Funds are lent with an average maturity of about two weeks. If the Bank believes that
there are surplus funds available in the banking system and wishes to reduce the
amount of money available for lending in the banking system, it can mop these up
through outright sales of UK Treasury bills.
Read More : Sterlings Money Markets

The Money Markets

The markets for borrowing and lending funds over the short
term, traditionally known as the money markets. Borrowers include corporations,
banks and governments. Investors include pension funds, insurance companies,
corporations, governments and some retail investors. Money dealers working for
major banks provide liquidity to the market by continuously taking in deposits and
making loans (also known as ‘placements’). Borrowers can also raise funds directly
from investors by issuing short-term debt securities which are tradable in secondary
markets. We look at key domestic money markets and also at the international market
for funds, known as the Eurocurrency market. A domestic market is one in which funds
are borrowed and lent in the domestic currency, subject to the authority of the central
bank. The largest in the world is for deals made in US dollars contracted inside the
United States. We consider the role of central banks such as the US Federal Reserve,
the European Central Bank, the Bank of England and the Bank of Japan in the day-today
operations of domestic money markets and in setting interest rates. We look at how
governments borrow on a short-term basis by issuing Treasury bills, and their repo
operations. The Eurocurrency market is an international wholesale market for
borrowing and lending and is based in major international financial centres such as
London. We explore some of the reasons for the growth of the Eurocurrency market
and the major types of financial instruments used in the market, including
Eurocurrency loans and deposits, certificates of deposit and Euro-commercial paper.

Domestic Money Market
The money markets are markets for borrowing and lending funds over the short term.
‘Short term’is usually taken to mean a maturity of one year or less, although in practice
some money market deals have maturities greater than one year. Major economies such
as the US, Germany, France, the UK and Japan have highly developed Domestic Money Market
in which short-term funds are borrowed and lent in the local currency, subject
to the control of the regulatory authorities of that country, normally the central bank.
These domestic money markets are quite distinct from the so-called Eurocurrency Market
which is an international market in which banks take deposits and make loans
in a range of currencies outside the home country for those currencies and outwith the
direct regulatory control of the central banks responsible for those currencies.


Market Participants
Borrowers using the money markets include:

• financial institutions such as commercial and investment banks;
• companies (often known as ‘corporates’in the banking world);
• governments, their agencies, state and regional authorities.

The main investors are organizations (and some individuals) with surplus cash to invest,
including:

• insurance companies, pension funds and mutual funds;
• the treasury departments of large multinational corporations;
• governments, their agencies, state and regional authorities.

Money dealers working for major investment banks and securities houses around the
world bring borrowers and investors together by ensuring that there is an active and
liquid market for money market instruments. Business is conducted by telephone and
through computer screens rather than on a physical marketplace. At the simplest level,
money dealers take in short-term deposits and make short-term loans (sometimes
known as ‘placements’). They may also trade a range of short-term interest rate
products such as Treasury bills, commercial paper and certificates of deposit.

US domestic Market

Activities in the US domestic money markets are dominated by the operations of the
Federal Reserve Systems, the US central bank. The ‘Fed’is increasingly used as a model
for central banks around the world, and many of the features of the system appear in
the new European System of Central Banks.
The Federal Reserve System was set up by Congress in 1913 and consists of 12
District Federal Reserve Banks and a Board of Governors appointed by the US
President and confirmed by the Senate. Major policy decisions affecting the supply of
credit and the cost of money in the US are taken by the Federal Open Market
Committee (FOMC) which includes the Governors, the President of the New York
Reserve Bank and the Presidents of four of the 11 other District Banks. Since 1980 the
FOMC has held eight regularly scheduled meetings each year at intervals of five to eight
weeks.

At its meetings the FOMC considers:

• the current and prospective business situation;
• conditions in the financial markets;
• economic trends such as income, spending, money supply, business investment;
• the prospects for inflation in the United States.

Read More : The Money Markets