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Money-Market Funds Hit Record Level

Total assets in money-market mutual funds reached a record of nearly $3.5 trillion this week, as the flight to safety -- which has its roots in the start of the credit crunch last summer -- continued.

IMoneyNet says in its weekly Money Fund Report that $14.5 billion was added to money-market funds for the week ended Tuesday.

"We have weeks where there are net outflows, but going over the past year since the credit mess began we've seen inflows almost every week," says Connie Bugbee, managing editor of the report.

Investors shifted $5.3 billion in cash away from prime institutional funds into municipal-bond funds, which are considered safer. Government funds do not hold commercial paper, which is a short-term debt instrument for corporations that is considered riskier because it is not backed by collateral.

Investors also moved some cash from taxable funds into nontaxable funds as yields reached near-parity. Taxable yields have been dropping since the Federal Reserve began slashing its interest-rate target in September, and are now close to that current 2% level.

Concern about the health of monoline insurers also persuaded some investors to take their cash out of institutional funds, Bugbee notes. Moody's recently placed the top-tier "AAA" ratings of Financial Security Insurance (FSA) and Assured Guaranty (AGO - Get Report) on review for possible downgrades, citing "elevated risks with the financial guaranty insurance market." It placed the lower-tier "B2" ratings of XL Capital Assurance (XL - Get Report) under review for a possible downgrade as well.

Taxable-fund yields now average 1.87%, up slightly from 1.86% a week earlier. Tax-free funds rose quite a bit more, to 1.73% from 1.67%.

As a result, tax-free fund assets, "mushroomed" to a record of $521.4 billion, a one-week gain of $13.36 billion, according to Money Fund Report.

Bugbee says that while taxable fund yields closely follow the Fed target, "the tax-free side kind of marches to its own drummer." Once yields normalize a bit, she expects cash to flow back into institutional and other taxable funds.

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