What it means
Money market funds hold very short-dated, high-quality debt: government bills, bank certificates of deposit and top-rated commercial paper. Historically many of them priced their shares at a constant $1.00 using amortised cost accounting, which smooths tiny day-to-day price wobbles.
The fund still earns interest, which is paid out as income rather than shown as a rising share price. Breaking the buck means the fund's true net asset value per share has drifted far enough below $1.00 that it can no longer be rounded back.
The usual trigger point is $0.995, because that is where standard rounding to two decimal places stops producing $1.00. Getting there normally requires either a default in the portfolio or a sharp rise in short-term interest rates.
It matters because corporate treasurers, pension schemes and ordinary savers treat these funds as a cash substitute. If the cash substitute loses value, payroll and supplier payments that were assumed to be safe suddenly are not.
That fear is what turns a small loss into a run, as everyone tries to redeem at $1.00 before the price is cut. Regulators responded by splitting the market.
Institutional prime funds now generally publish a floating net asset value that moves with the market, while government and retail funds are still allowed to aim for a stable $1.00. Many funds can also impose redemption fees or gates when their share of easily sold assets falls too low.
The practical lesson for a finance team is that a money market fund is an investment, not a bank deposit. It is not covered by deposit insurance, and the sponsor is not obliged to make investors whole.
Reading the fund's holdings and its weighted average maturity is a reasonable ten-minute exercise before parking several million dollars there.
In practice
Real-world examples.
Example
A corporate treasurer parks $40,000,000 of surplus cash in a prime money market fund ahead of a quarterly tax payment. When the fund publishes a floating net asset value of $0.9985, the balance is worth $40,000,000 x 0.9985 = $39,940,000 rather than $40,000,000, and the treasurer draws on a credit line to cover the $60,000 shortfall.
Example
A university endowment holds cash for a building project in an institutional prime fund. During a credit squeeze the fund imposes a 2% redemption fee, so withdrawing $25,000,000 costs $25,000,000 x 2% = $500,000. The finance committee delays a contractor payment rather than crystallise the charge.
Example
A fund sponsor spots that one holding is likely to default and buys the paper out of the fund at par using its own balance sheet. The fund's share price stays at $1.00 and investors see nothing, while the sponsor absorbs the loss to protect its reputation. That is how most near misses have historically been handled.
Formula
Calculation
Formula: net asset value per share = (market value of the fund's assets - liabilities) / shares outstanding. A fund breaks the buck when that figure falls below $0.995.
Worked example: The Meridian Prime Fund has 500,000,000 shares outstanding, all sold at $1.00. Its portfolio is worth $501,000,000 and it owes $1,000,000 in accrued fees and payables, so net assets are $501,000,000 - $1,000,000 = $500,000,000 and the net asset value per share is $500,000,000 / 500,000,000 = $1.00.
One issuer then defaults. The fund holds $5,000,000 of that issuer's commercial paper and marks it down to a recoverable $1,000,000, a loss of $4,000,000. Net assets fall to $500,000,000 - $4,000,000 = $496,000,000, and the net asset value per share becomes $496,000,000 / 500,000,000 = $0.992.
Because $0.992 sits below the $0.995 rounding boundary it cannot be reported as $1.00, so the fund has broken the buck. Investors face a loss of $4,000,000 / $500,000,000 = 0.8% of their money, which sounds trivial until you remember they were treating the balance as cash.Case study
Seen in the real world.
Calderwood Asset Management is an illustrative, fictional fund manager whose $8,000,000,000 prime money market fund held $60,000,000 of commercial paper issued by a specialist lender. When the lender missed a payment, the paper was written down to $20,000,000, a loss of $40,000,000, or $40,000,000 / $8,000,000,000 = 0.5% of the fund.
A 0.5% loss took the net asset value per share from $1.000 to $0.995, exactly on the rounding boundary. Calderwood's board chose to buy the defaulted paper out of the fund at its original $60,000,000 cost using the firm's own capital, restoring the share price to $1.00 and moving the $40,000,000 loss onto the management company's balance sheet.
The fictional example shows the real dynamic behind stable value funds. Their stability has often depended on a sponsor being willing and able to absorb a loss, which is a promise no investor can actually enforce.
Watch out
Common mistakes.
- Treating a money market fund as equivalent to an insured bank deposit, when it is an investment with no guarantee of returning $1.00 a share.
- Assuming a fund quoting a stable $1.00 carries no market risk, when the stable price is an accounting convention rather than a promise.
- Ignoring redemption gates and fees, which can lock up cash for a period even when the share price never falls below $1.00.
Questions
People also ask.
How far does the price have to fall before a fund has broken the buck?
Below $0.995, because that is the point at which standard rounding no longer produces $1.00 a share.
Why do sponsors sometimes rescue their own funds?
Because the reputational damage from a break usually costs far more than the loss itself, though no sponsor is obliged to step in.
Are government money market funds safer than prime funds?
Generally yes, since they hold government and repurchase agreement paper rather than corporate credit, but they still carry interest rate risk.
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