Ratings Downgrade Could Affect Some Money Market Funds

A review of over 100 banks by Moody's Investors Service could have impacts on certain investments. Here is some more information about the effects this could have for you.

According to recent financial news, Moody's Investors Service may downgrade the ratings of 6 US banks, which includes Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and Bank of America, as well as more than 100 European banks.

The expected credit rating downgrade by Moody's could have an effect not only on the financial institutions affected by it, but also on individual investors, especially those who place funds in money market funds. The issue affects mainly the most conservative money market funds, which are known to only buy debt that has the highest ratings. Therefore, commercial paper from these banks would not be able to be included in these funds. Even though the ratings haven't been downgraded yet, there are already funds which are reducing the amount of time that they lend money to banks that are on the list.

However, the news doesn't mean that investors in Money Market Funds will be left with no other options. Many of the most conservative funds would be instead switching to government debt, or commercial paper from non financial corporations. There is also the issue that Moody's is not the only agency that rates debt. If Standard and Poor and Fitch Ratings maintain the highest ratings for the banks, money market funds could still buy commercial paper from them. However, there is talk that money market management teams would not want to hold debt that has different ratings.

Financial experts have also stated that investors are a lot more eager in the past few months to look at commercial paper that is not issued by financial institutions. Therefore, those who wish to invest in money market funds will still continue to do so, however the portfolio of these funds is likely to change in May when the new ratings by Moody's will be released.

Of course, there are other investment options that remain available to individuals besides money market instruments. For those who want to maintain immediate availability of their funds, while keeping a decent overall return on their investment, high interest savings accounts, which pay around 2% of interest per year, are increasingly being used. Anyone who is looking for a place where they can invest their money should take a look at all available options to them. A professional financial advisor can make recommendations regarding which investments would be more suitable for an individual's goals, as well as their tolerance for risk.