What is a money market fund, and what does "breaking the buck" mean?
Everything in this course so far — bills, repo, commercial paper, CDs — trades in sizes no individual can access. Money market funds are how that market reaches everyone else, and how its fragility reaches everyone else too.
The instrument
A money market fund (MMF) is a mutual fund holding only short-dated, high-quality instruments: T-bills, repo, commercial paper, CDs. Companies and households use them as a place to keep cash. In the US they are governed by SEC Rule 2a-7, which imposes credit-quality limits, diversification requirements, a weighted average maturity capped at 60 days, a weighted average life capped at 120 days, and minimum liquidity buckets.
Three broad types:
- Government funds — at least 99.5% in cash, government securities, and repo backed by them.
- Prime funds — which buy corporate CP and CDs. More yield, more credit.
- Tax-exempt (municipal) funds.
The famous feature is a stable $1.00 net asset value per share, maintained through amortised-cost accounting, for government and retail funds. Institutional prime and institutional municipal funds were moved to a floating NAV by the 2014 reforms, effective October 2016 — precisely because the stable price was the misleading part.
Breaking the buck
Breaking the buck means the NAV per share falls below $1.00: investors lose principal on something they had been treating as cash.
The canonical case is the Reserve Primary Fund, the oldest money market fund in the US. Lehman Brothers filed for bankruptcy on 15 September 2008. On 16 September 2008, the fund announced that after writing off $785 million of Lehman commercial paper, its NAV had fallen to $0.97.
The mechanism is what matters, not the loss
$785 million against the fund's roughly $62.5 billion of assets is about a 1.3% hit — survivable in isolation. It arrived as a 3% hit on NAV only because redemptions were being paid out at $1.00, shrinking the share base the loss had to be spread over. What happened next was not about the loss.
The promise had been "this is cash." Once one fund broke it, institutional investors redeemed from prime funds generally, hundreds of billions of dollars left within days, prime funds stopped buying commercial paper in order to raise liquidity, and the CP market — where real companies fund real payroll — seized. The US Treasury temporarily guaranteed money fund shares and the Federal Reserve launched facilities to buy the paper the funds would no longer touch. A 3% loss in one fund became a funding crisis in the real economy, through the door marked "everyone leaves at once."
Why the structure invites it
An MMF offers daily redemption at a stable price while holding assets that are only mostly liquid. If you think the fund might impose a gate, redeeming first is individually rational — and everyone reasoning that way produces the run. Being early is rewarded; being late is not.
March 2020 showed the reforms could even sharpen that incentive. Because the 2014 rules linked possible fees and gates to a fund's 30% weekly-liquid-asset threshold, investors had a concrete reason to leave before the threshold was reached. The SEC's 2023 reforms cut that link, raised minimum liquidity to 25% daily and 50% weekly, and introduced mandatory liquidity fees for institutional prime and tax-exempt funds.
The sentence to keep
A money market fund share is a claim on a portfolio, not a deposit. It is not a bank account and it is not insured. The stable $1.00 is an accounting convention, and it has twice in living memory — in 2008 and again in March 2020 — required emergency public facilities to hold. That is a description of documented history, not a claim about any fund today.
Try it now
- Open a large money market fund's published holdings. Every US money market fund files its full portfolio each month on SEC Form N-MFP, searchable on EDGAR, and the large sponsors post the same list on the fund's own page (the Fidelity Government Money Market Fund and the Vanguard Federal Money Market Fund are two of the largest). Is it a government or a prime fund, and what proportion sits in repo?
- Set SOFR against the 4-week bill's coupon-equivalent yield, both on 24 September 2026 in the tables below, with the bill multiplied by 360/365 so the two share a day count. Those two instruments are most of a government fund's return.
- Explain "breaking the buck" to someone in two sentences — without using the word "safe."