With more countries either introducing or talking about instating negative interest rates — Japan was the latest to go minus, on Jan. 29 — many Americans are concerned about what might happen here if the Federal Reserve has to reverse course and go the sub-zero route, too. One particular part of the investment industry is likely more nervous than most: the money market sector.
These investments are generally thought of as safe haven investments. The goal of these funds is to never lose money and maintain a net asset value (NAV), or per share value at $1. But if rates go negative the fear is they may be in danger of "breaking the buck." In 2008, at the height of the financial crisis, the share price of one fund fell below a dollar and nearly triggered a panic among institutional investors and required the government to set up a temporary insurance program. Since then, these funds operate with more stringent regulatory rules: they must take on less credit risk and have more of a cash cushion to handle redemptions.
Over the last eight years, interest on money market funds has declined significantly. In 2007, rates were around 4.5 percent. Today they're at about 0.1 percent. If rates fall further, Americans will be lucky to even get a single basis point on their investment.