Investors ought to be careful and shrewd in their use ofmoney market alternatives. With short-term rates nearzero, many people have looked past traditional cashvehicles such as savings accounts and money market funds,to a spectrum of short-term vehicles, from relatively safeoptions like short-term bond funds to riskier, leveraged structures.
Unlike money market funds, these alternatives may losemoney when short-term interest rates rise. Until recently,rising short-term rates have seemed unlikely. But the 2-yeartreasury yield rose following the Federal Reserves recentmeeting, in anticipation of eventual rate hikes (chart).Since then, Fed Chairman Janet Yellen has walked backher comments regarding higher rates. Even so, manymoney market alternatives lost value in March. Indeed,the potential losses may be greater than the potential gainsfor many of these vehicles.
While earning next to nothing on money marketinstruments is undesirable, it is better than losing money.If you are reserving money for near-term spending needs,traditional cash equivalents may be your best option.