Breaking the Buck

Breaking the buck is when a money market fund that aims to keep its share price at exactly $1.00 can no longer do so, because the value of its holdings has fallen below that level. Investors who expected to redeem each share for a dollar get less. The phrase comes from the US mutual fund industry, where stable-value funds are widely used as a near-cash alternative to bank deposits.

It has happened rarely, but each case has mattered because these funds are a major source of short-term funding in the money markets. Breaking the buck is different from a simple fall in a fund's yield, and from a bank failure, since fund shares carry no deposit insurance. The closest crypto equivalent is a stablecoin depeg.

A money market fund is meant to behave like a very safe savings jar. You put in a dollar, the fund lends it out for a few days or weeks to governments and large companies, and you can take your dollar back whenever you like, with a little interest on top. Because the loans are short and safe, the jar almost always holds at least a dollar for every dollar put in.

Breaking the buck is the moment the jar comes up short. One of the borrowers fails to repay, so there are now only 97 cents in the jar for every dollar people think they own. Once word spreads, everyone rushes to take their money out first, just as customers line up outside a bank they think is in trouble.

Under Rule 2a-7 of the Investment Company Act of 1940, US money market funds that qualify may value holdings at amortized cost and round their share price to the nearest cent. The underlying market value is still calculated as the fund's net asset value:

Total assets are the market value of the fund's securities and cash, liabilities include fees and amounts owed, and shares outstanding is the number of fund shares in issue. Because of penny rounding, a fund reports $1.00 as long as this figure stays at $0.995 or above; it breaks the buck when it drops below that.

Suppose a fund with 1 billion shares holds $1.0 billion in securities and owes $1 million in fees. NAV is $(1{,}000{,}000{,}000 - 1{,}000{,}000) \div 1{,}000{,}000{,}000 = 0.999$, which rounds to $1.00. If a $30 million holding is written down to zero, assets fall to $970 million and NAV becomes $969{,}000{,}000 \div 1{,}000{,}000{,}000 = 0.969$, or about 97 cents.

The first widely reported case came in 1994, when the Community Bankers US Government Money Market Fund, which served small banks, lost money on interest-rate-sensitive securities after the Federal Reserve raised rates. It was liquidated and paid investors about 96 cents per dollar.

The case that changed the industry came in September 2008. The Reserve Primary Fund, run by the firm that launched the first US money market fund in 1971, held about $785 million of commercial paper issued by Lehman Brothers, which filed for bankruptcy on 15 September. On 16 September the fund wrote that paper down to zero and its share price fell to 97 cents. Redemption requests flooded in, the fund suspended withdrawals, and investors in other prime funds, which hold corporate debt, pulled out hundreds of billions of dollars within days, moving into funds holding Treasury bills.

That run starved companies of short-term funding. On 19 September the US Treasury announced a temporary guarantee for money market fund shares, and the Federal Reserve opened a facility to help banks buy asset-backed commercial paper from the funds. Both steps extended a lender-of-last-resort style backstop to institutions outside the banking system, a central lesson of the 2008 financial crisis.

The Securities and Exchange Commission has tightened the rules three times:

• 2010 reforms. Funds had to hold minimum daily and weekly liquid assets, shorten average maturities and report holdings monthly.
• 2014 reforms. Institutional prime and tax-exempt funds had to float their share price, and boards gained powers to impose fees and redemption gates in stress.
• 2023 reforms. After heavy outflows from prime funds in March 2020, which again needed Federal Reserve support, the SEC removed redemption gates, raised liquidity minimums to 25 percent daily and 50 percent weekly, and required mandatory liquidity fees for institutional prime funds facing large outflows.

Government funds, which hold Treasuries and Treasury-backed repo, may still keep a stable $1.00 price.

The 2008 episode is often cited in debates about stablecoins, which also promise one-for-one redemption and invest reserves in short-term government debt to earn reserve yield. Both can face runs if holders doubt the assets. Newer tokenized money market funds put fund shares on a blockchain but remain subject to the same fund rules. Regulators concerned with financial stability see breaking the buck as a classic example of a run in shadow banking.

• Federal Register: SEC Money Market Fund Reforms final rule (2023)
• SEC Rule 2a-7 (Money market funds), eCFR