Rates on Money Market Funds Spike

The rate on money market funds, not money market accounts, have spiked over the last couple of days due to the credit crisis. Money market funds can be thought of as mutual funds that are compsed of short-term, high-grade debt obligations and cash-on-hand to ensure liquidity. Although they are considered very safe, the collapse of Lehman Brothers last week caused several funds to halt redemptions and fall in value. In response, the government insured all money invested in these funds as of last Friday.

This week, rates have moved markedly higher. The top rate on a consumer prime money market fund according to the BestCashCow rate table is the USAA Money Market Fund paying 3.48% 7-Day Trailing Yield. This compares to the highest 7-Day Trailing Yield from last week of 2.60%.

Yields are rising as banks continue to aggressively seek funding to maintain their operations. Inter-bank lending has virtually come to a standstill as the rate at which they lend to each other has it a record high.

Much of this increase is due to the fear premium. If the government's $700 billion bailout plan is approved, rates on money markets will start to drop.