General Collateral At -0.002%: Lowest EVER, As Scramble Out Of Money Markets Hits Afterburner, Primes

Tyler Durden's picture

A few days ago we pointed out that special repo rates are now negative. Fine. How big is special collateral after all - in the grand scheme of things it is a tiny market. Well, as of today, General Collateral just hit -0.002, the lowest rate in the history of the series, and in our humble opinion this is a far more troubling indication of broad liquidity developments than the 1 month bill touching on -0.001%. Simply said, this confirms our speculation that there is now a massive rolling of funding out from money markets and into any market that will accept the maturing short term funding without it being rolled due to European contagion concerns. We said: "this latest move has unpleasant implications for money market managers, who unable to find yield in repo (0.01%?) will now be forced to look for higher yielding assets, and thus expose them to even more contagion risk once the house of cards falls, facilitating the "breakage of the buck" once again just like what happened in the aftermath of the Lehman catastrophe, and snarling all global fund flows, forcing the Fed to become liquidity provider of last resort." As of today, this prediction is well en route to being confirmed.

After we have been pounding the table on this threat for over a week, finally this topic has gotten sufficiently relevant that Bloomberg decided to dedicate an article to it:

Institutional investors pulled out of U.S. prime money market funds at the fastest pace in 15 months as they shifted assets to funds that invest only in U.S. government-backed securities.

Institutional funds eligible to buy corporate debt lost $39 billion to net withdrawals in the week ended June 28 and $75 billion in the past two weeks, according to data from research firm iMoneyNet in Westborough, Massachusetts. Institutional money funds that buy only U.S. government-backed securities gathered $27 billion in net deposits

The logic for the scramble out of money funds is as expected: Europe.

The European sovereign debt crisis has raised concern that prime money market funds may suffer losses if sovereign defaults cause big banks to fail to meet obligations. Greek Prime Minister George Papandreou today clinched enough votes to pass the first part of an austerity plan aimed at meeting European Union aid requirements and staving off default for his debt- laden nation.

A Greek default would pose a potential threat to money funds because they have lent to European banks that, in turn, have lent to Greece and other heavily indebted European countries. U.S. money funds eligible to buy corporate debt had about $800 billion, or half their assets as of May 31, in securities issued by European banks, Fitch Ratings estimated.

And yes, it is a big move:

The $39 billion withdrawal was the most pulled from prime institutional funds in one week since investors took $42 billion out in the week ended March 16, 2010.

What is surprising is that in a closed-end liquidity system, the excess money market funds, which have certainly gone into repo, have so far not invested one cent into equity markets, and instead have pushed aggressively into general fixed income: the same product  which for the past 2 weeks has seen dramatic pain courtesy of one after another worse auction and a general blowing out of the curve now that everyone is wondering how soon before Bill Gross is finally proven right.

Per ICI, domestic equity funds saw an outflow of $4.3 billion in the week ended June 22: the 9th consecutive week of outflows, during which time mutual funds were met with $27 billion of redemptions. Is there any wonder the Fed would do everything in its power to push the market higher at the end of the month and prevent a redemption-driven liquidation drop in the market, facilitated by near record NYSE margin debt?

Is it time to start guessing who will break the buck first?

For those asking, here is a long-term chart of GC:

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GeneMarchbanks's picture

Seems Hyperinflationary which is bullish.

CrazyCooter's picture

I have some 401k bucks in money market right now (100% actually). I have a genuine question: if my options are equities, bonds, reits, or money markets, do I really have a better option?

I have pretty much accepted that the paper empire is going to divide by zero at some point, so figured this was my best chance to minize losses during the turmoil phase. I will go into equities at some point, but only if stocks completely tank.

Would be interested in constructive thoughts on the subject.



Montecarlo's picture

I have the same poor choice.  Finally received an offer at a new employer.  I'll be cashing out part of that 401K this year - screw it, maybe the whole damn thing!

Thomas's picture

If you can, go to treaury-backed money market funds. The current standard MMF pays you nothing for the risk--absolutely zero. James Grant has been crystal clear on this point this week.

redpill's picture

That's the problem with 401ks, your options tend to be restricted if its a company plan.  if it's an independent 401k under a corporation you own or something, then that is a different story, though.  There is 401k eligible precious metals but they'll probably figure out a way to hose you on that.  If you can get an independent broker involved I like the concept of getting some of the money overseas in non-US dollar currencies that are more likely to appreciate and in companies that are stable, profitable, and provide a good dividend.  That way even if you don't get capital appreciation out of the stock, you get dividend income in an appreciating currency and you can do OK.

Otherwise I might think about pulling back on your contributions until it becomes more clear what the hell is going to happen in the near term.  If anyone tells you they know with certainty, run the other way.


macholatte's picture

...currencies that are more likely to appreciate and in companies that are stable, profitable, and provide a good dividend...

Give me my robe, put on my crown; I have Immortal longings in me.
William Shakespeare

Well sure, it comes complete with diagrams on page 47 of how to be a detective in 10 easy lessons correspondent school textbook and uh, your father offered me a drink.
-- Philip Marlowe


optionswriter's picture

He might be able to buy CYB (Chinese) AUD (Aussie) etc. etf's to get exposure to foreign currencies.  (Not a recommendation of course.  You need to do your own homework.) 

CrazyCooter's picture

I actually went through all ... 18 prospectuses or there abouts ... in actuality I have four choices as listed. They present them as more options, but there aren't really. By this I mean I got 6 options that are all similar blends of equities and bonds, or I got all bonds, or I got all govvies, or some reits. Like that.

I don't have a lot in (I cashed out when I moved) so just accumulation since Feb. That doesn't preclude me from paying attention though.

As long as money market doesn't book a permanent loss, I am happy, but if money markets are about to book some haircuts, I don't want any of that.



blunderdog's picture

If you're talking a small amount of your overall wealth in your 401K, it makes as much sense as anything else.  But if *most* of your money is in a 401K, you'd be well-served to cash some out, tax-penalty be damned, and put it into a commodity of real value.

If you've already got 25% of your wealth in physical PMs, then maybe leaving another X% in paper is a good idea.

dcb's picture

no, you fing trade it. keep it in.

blunderdog's picture

When you're talking about paper, "liquidity" is another way of saying "can be lost instantly."

Fing sht dchbg.

BoNeSxxx's picture

I have a genuine question: if my options are equities, bonds, reits, or money markets, do I really have a better option?

Yes.  It's called an Open Opportunity IRA.  Do it now before the assholes kill it.  It's legit and and it makes complete sense.

You open a LLC and then register with a custodian.  There are companies that will help with all of it for a small fee (most of it payable by the LLC).  Once funded (with your own $$$), you can invest it (as manager of the LLC) in pretty much anything you want -- Gold, Silver, Land, etc...

As I have posted here in the past, my IRA now owns acres of beautiful farm land with a crystal clear spring delivering over 100 GPM of potable water.

I like that much better than FRNs, MMs, or any vehicle traded by the ass clowns on Wall St.

If anyone wants more info, you can hit me up at


CrazyCooter's picture

My contributions are mandatory, otherwise I wouldn't be putting any in at all. My choices are very restricted, so nothing other than the 18 flavors presented.

I figured out the scam that 401ks are at my last job when I needed cash badly during divorce. My money wasn't mine!

I do save PMs on the side, with left over savings, am working on a small pile of emergency cash, and have a calorie stash to boot. Nothing huge mind you, but gotta start somewhere!

Thanks all for the feedback.



hambone's picture

Hey Coot - I'm in same spot as you...not sure of your situation but I'm of the mind nobody knows how this will play out so I'm figuring best to have a diversified portfolio, so use the 401k part as the equity or bond or MM holding portion (fucked up paper part that I have to admit could do well in many circumstances whether I believe in it or not). 

Beyond that I hold 6 months worth of cash and 1yrs worth of PM's - beyond that I look at multi family rentals w/ enough down to be cash flow positive). 

Right or wrong, I don't know but I'm sleeping better w/ a more hedged outlook.

Plus, nothing beyond checking acct in bank.


hambone's picture

BTW - would be nice if ZH had a defcon (or multiple opinions) of defcon warnings available.  Hard to keep days after days dire warnings and dire structural issues in perspective. 

Serious, some kind of "advanced economic tsunami" warning (1-7) or whatever would be helpful...nobody's gonna hold you to it but some gauge to help understand is it time to pull what's left from the bank, is it time to load the shotgun, is it time to load the car, is it time to drink another G&T and laugh while we watch the bullshit circus?

On a 1-7 scale...where do people (smart people...wall street economists ruled out) think we are???  4? 6? 6.9? 7.1?

Misstrial's picture

Good idea, but for now, you'd have to subscribe to an investment newsletter in order to get those warnings.

2 days ago, Larry Edelson of Uncommon Wisdom sent out an alert telling subscribers to get out of MMMF and gave us a list saying that if we had any positions in these funds to get out now.

Here is part of his alert:

"The venerable James Grant of Grant's Interest Rate Observer recently published an article confirming what I suspected all along: Money Market Mutual Funds, or MMMFs, are plowing tons of their investors' money into European banks and securities in search of higher yields.

Never mind the fact that they're picking up, at best, one more basis point of yield (.01) for their investors — enough to double your principal in 6,931.8 years — they're taking on huge lop-sided risks investing in Europe's banks, just as the European sovereign debt crisis is starting to pick up momentum.

Grant cites the five largest money market mutual funds, which hold a total of about $230 billion of customer funds. An average of 41% of their assets are invested in Europe.

That's insane. When Europe goes down the tubes, which it will, that money is at risk, big time. And even if Europe doesn't totally meltdown, the euro is sure to get annihilated in the months ahead. So the currency risk alone could cause these funds to inflict some pretty heavy losses on their depositors.

The five money market mutual funds Grant cites are ...

 Fidelity Cash Reserves (FDRXX)

 Vanguard Reserve Prime (VMRXX)

 Fidelity Inst. Prime MM Portfolio (FIPXX)

 Fidelity Inst. Money Market Portfolio (FNSXX)

 BlackRock Liquidity TempFund (TMPXX)

If you own any of these money market funds, just get the heck out. Period."


CrazyCooter's picture

Ohhh, this is good (bad) stuff. My MM is State Street, but my fear was exactly what you just said was happening. I don't want a return at this point, I just don't want a haircut. I first started getting nervous when I saw BruceK post on this subject.

Here is what I am saddled with (bulk of each option):

  • Russel 3000
  • 87% large cap stock / 10% small cap stock
  • 71% small cap stock / 21% mid cap stock
  • 100% non US stock
  • 100% non US stock
  • 30% t-note / 36% corp bond / 10% t-bond / 10% fed agency bond
  • 71% t-bond / 17% fed agency bond / 6% t-bond
  • 100% treasury
  • 99% TIPS
  • 99% non US govvie bonds
  • 95% SIC (sythetic investment contracts)
  • 100% t-bills
  • 100% reit
  • 43% us stocks / 35% cash / 11% non US stocks / 10% bonds (2010 target)
  • <<bunch of date targets inbetween>>
  • 72% us stocks / 18% non US stocks / 10% bonds (2055 target)

I am for sure going to reallocated tommorrow. I guess my next best safe bet is one of the bulk US Treasury funds, but not sure I have an opinion beyond that. Anyone have thoughts on treasury blend versus t-bills versus tips?

UPDATE: It looks like my MM is 100% t-bills, so I think I am going to stand pat. I should have looked closer before posting but I was hacking in the data ...



Misstrial's picture

Please see my post below re GICs. imo, T-bills and short-term Treasuries are OK.


Yen Cross's picture

  Thanks cooter. keep up the good work. Can we keep it horizontal please/via trend lines and candles/?

blunderdog's picture

Remember that DEFCON is about providing a state of readiness.

This week and the first two days of next week should definitely be considered DEFCON 2.

No doubt about that.

unununium's picture

Move it to an all-equity option, and buy an offsetting $ amount of SH in your IRA.

Rebalance occasionally.

Misstrial's picture

My MMMF switched out from lending to euro banks to investing in U.S.-based insurance contracts - synthetic GICs and traditional GICs.




Dont Stop the Carnival's picture

I read in a ZH article that 44% of Money Market Funds are invested in European Banks.  I'd be getting the heck out of anything associated with European Banks right now.

Citxmech's picture

My wife and I cashed-out, took the hit, and put the proceeds into PMs.  We were back in the black within a year and now are miles ahead of where we would have been had we left the money in the market.

It was a little stressful at first - but we never regretted our decision.   

Enceladus's picture


Your money market is provided by a mutual fund company. Go pull the prospectus and see if you can find what your exposure maybe. i.e what are the underlying investments. Money markets generally invest is very short term, highly liquid paper, but they have latitude in the specifics. In 2008, the 65 billion, Reserve Primary Fund 'broke the buck', that is it fell in price from $1.00 NAV when a $785 million investment it had Lehman's went to zero. 

Besides how the money market is invested is the issue of systemic liquidity, which is why the FED/Tres/FDIC stepped in to guarantee money market funds in '08 preventing a run on the banks. If the banks won't lend and everyone pulls their money, funds can freeze withdrawals for up to 7 days. This potential of a liquidity freeze is the second reason some are concerned about Europe's banks.

~Linda Green

CrazyCooter's picture

Oh, I should have looked closer when I posted earlier with my list of options ... it looks like my MM is 100% t-bills. They list 87% of the allocation (I just ten keyed it) which are all t-bills for May/June (as of March this year). I suppose it is possible they changed the allocation. I will have to double check, but if I can't confirm anything, I may just stick with what I got.

Thanks for your response!



ThirdCoastSurfer's picture

I'm no financial advisor, but if your risk tolerance level is money market then you have no choice but to sit in cash or other low risk and wait until inflation or hyperinflation or some other factors raise the interest rates. To do anything else will risk getting caught in a situation where your riskier investment is at a negative return at just the point that the interest rates become attractive and to dump one in favor of another will leave you in a hole that negates the positive effect of an increasing interest rate.  

It isn't what your balance is today or in 5 years, it's what you'll have beginning when you reach age 59.5. It's not that you'll have enough to retire on a yacht but to retire "comfortably" and that is the function that interest rates play in the first place. 

anti Oligarchy's picture

Speaking of Hyperinflation, I think its time for another round of Inflating the ZeroHedge bank account.


This is the type of information, dialogue, and general anit Cartel activity we need to support.

What better use for worthless dollars than to support Tyler's gold habit?

mortiis's picture

good call... i've been advocating to my friends/family for a while that we should pull our money out of wall st and invest locally, or in causes we believe in (after saving "enough")... i haven't donated to ZH in a bit.  read it every day and this is a "cause i believe in."

time to put my money where my mouth is!

tao400's picture

That's exactly what I was wondering. I was literally about to go buy some dividend producing stocks like intc and boeing because of this. Anyone have an answer as to what they think is safe now.

CrazyCooter's picture

Just commenting off the cuff, but the only thing that is safe during a tsunami is only knowable in retrospect. If TSHTF in financial markets again, I think there are going to be lots of surprises with regards to what isn't standing when the waters recede.



SheepDog-One's picture

Hyperinflation cant happen, no one can afford it, americans are bankrupt.

blunderdog's picture

Hyperinflation won't happen, but that's not why.  Our current saving grace is we have no competing form of exchange.

(No one can ever afford it when it comes.)

hugovanderbubble's picture


iF anyone could explain

This upward movement in the indexes is just a window dressing? (Its typical the last week of any quarter?)


101 years and counting's picture

he already answered your question:

"Is there any wonder the Fed would do everything in its power to push the market higher at the end of the month and prevent a redemption-driven liquidation drop in the market, facilitated by near record NYSE margin debt?"

buzzsaw99's picture

the hedgies are probably doing some of that to lessen redemptions. also, dumb pension money will be pouring in on friday and monday, so they are front running that. booyah!

statlawyer's picture

if it is window dressing it's unusual. I got a free moment at work today and looked back at the end of quarters for the last couple of years. The last week of each quarter is normally flat to down from what I can tell...

buzzsaw99's picture

yeah but paulson had that fraudcap thing and bill miller et al were heavy into the flagging financials. desperation.

statlawyer's picture

hope you're right. S&P needs to finish out the right side of its shoulder already. I'm getting raped in my short positions, but I know the instant I cover it will all go back down...

buzzsaw99's picture

here's hoping for a bloodbath in july.

youngman's picture

The politicians...the bankers..the money fund guys....they have to print this stuff away....that is their only option of survival...if the people have a choice..they would rather default...take the pain..and get on with life...we are close to a total breakdown I think...the Greeks will riot until it destroys their country...then the other chips fall...Spain has hidden debt...I am sure italy does too...and the US banks say they only have 41 billion exposed...yeah right...I be GS is talking right now to get all their CDS covered again by the Feds like their AIG ones...first in line for the bailouts...hang in their boys...we got problems coming up..

SWRichmond's picture

the US banks say they only have 41 billion exposed...yeah right

Yes, this is why the Fed has decided it was necessary to stuff the excess reserve acconts with $1.6 Trillion.

disabledvet's picture

"his name is Sudden Debt" and absolutely Europe is hiding trillions of it.

slaughterer's picture

This week looks like a nice EOQ window dressing ceremony.  Expect things to break down on Friday with an ISM print below 50.  

Boston's picture


And it's the FIRST day after the end of QE2.

Getchya popcorn ready!

blunderdog's picture

Here, here.  I'm tempted to take a day off work just so I can pay closer attention. 

DoChenRollingBearing's picture

This means that holding cash FRNs have no opportunity cost...

Hank Paulson's picture

just picked up some V stock after hours, is there any real chance I can lose, I mean, come on!