Money market funds target a stable $1.00 net asset value but must reprice once NAV deviates by more than half a cent, the mechanism that forced Reserve Primary Fund to break the buck in 2008 after a $785 million Lehman Brothers exposure; institutional prime and tax-exempt funds now float NAV instead, as the industry's assets reached a record $6.4 trillion at the end of 2023.
What assets do money market funds invest in, and how does scope differ by fund type?
Money market funds are mutual funds that invest in liquid, short-term debt securities, cash, and cash equivalentsCITE:E1. Within that category, prime money market funds concentrate on taxable short-term corporate and bank debt instruments, such as commercial paper and certificates of depositCITE:E2.
How do money market funds maintain a stable net asset value, and what triggers a repricing?
Most money market funds, including those intended for retail investors and government money market funds, seek to keep their net asset value (NAV) at a stable $1.00 per shareCITE:E3. A stable-NAV fund must reprice its shares away from $1.00 once the NAV per share deviates by more than half a cent from that levelCITE:E4 — the event commonly known as "breaking the buck."
How did Reserve Primary Fund break the buck during the 2008 Lehman Brothers collapse?
Reserve Primary Fund was holding Lehman Brothers debt valued at $785 million at amortized cost when Lehman Brothers declared bankruptcy early on Monday, September 15, 2008CITE:E5. Losses on that exposure caused Reserve Primary Fund to break the buckCITE:E5.
How did regulatory reform change pricing for institutional funds?
Institutional prime money market funds and institutional tax-exempt money market funds are not allowed to use the special pricing and valuation conventions that support a stable NAVCITE:E6. Instead, these fund categories must float their NAV like other mutual funds, so share value reflects changes in the current market-based value of fund assetsCITE:E6.
How large was the U.S. money market fund industry at the end of 2023?
U.S. money market funds' aggregate net assets reached a new record of $6.4 trillion on December 31, 2023, according to the Office of Financial Research's monthly U.S. Money Market Fund MonitorCITE:E7.
Key figures at a glance
| Metric | Value | Date | Evidence |
|---|
| Target stable NAV per share | $1.00 | — | E3 |
| Re-pricing trigger (NAV deviation from $1.00) | more than half a cent ($0.005) | — | E4 |
| Reserve Primary Fund Lehman Brothers debt exposure (amortized cost) | $785 million | September 15, 2008 | E5 |
| U.S. MMF industry aggregate net assets (record) | $6.4 trillion | December 31, 2023 | E7 |
What this means
The stable-NAV mechanism that most retail and government money market funds still use operates within a half-cent tolerance bandCITE:E4, and the only documented breach of that band in the evidence — Reserve Primary Fund's $785 million Lehman Brothers exposure in September 2008CITE:E5 — was enough to force a repricing away from $1.00. The regulatory response addressed part of that fragility by requiring institutional prime and institutional tax-exempt funds to float their NAV rather than rely on stable pricing conventionsCITE:E6, while retail and government funds continue targeting the stable $1.00 structureCITE:E3. That split framework has coexisted with substantial growth in the overall industry, which held a record $6.4 trillion in net assets at the end of 2023CITE:E7.
FAQ
What assets do money market funds invest in, and how does scope differ by fund type?
Money market funds are mutual funds that invest in liquid, short-term debt securities, cash, and cash equivalentsCITE:E1.
How do money market funds maintain a stable net asset value, and what triggers a repricing?
Most money market funds, including those intended for retail investors and government money market funds, seek to keep their net asset value (NAV) at a stable $…
How did Reserve Primary Fund break the buck during the 2008 Lehman Brothers collapse?
Reserve Primary Fund was holding Lehman Brothers debt valued at $785 million at amortized cost when Lehman Brothers declared bankruptcy early on Monday, Septemb…
How did regulatory reform change pricing for institutional funds?
Institutional prime money market funds and institutional tax-exempt money market funds are not allowed to use the special pricing and valuation conventions that…
Author's Take・EffectStory 編輯部
The half-cent tolerance built into the stable $1.00 NAV structure is a razor-thin margin: Reserve Primary Fund's break in 2008 traced back to a single $785 million exposure to Lehman Brothers, a concentration that a $6.4 trillion industry could in principle reproduce at far larger dollar scale today. The post-crisis decision to make institutional prime and institutional tax-exempt funds float their NAV — while retail and government funds keep targeting a stable $1.00 — effectively concedes that fixed pricing cannot absorb every credit-event loss, and draws a structural line between fund categories rather than eliminating the underlying risk. The concrete indicator worth watching is any reported NAV deviation approaching that same half-cent threshold during a future credit stress episode, since that is the exact metric that forced Reserve Primary Fund's repricing in 2008.