, Volume 27, Issue 1, pp 51-76
Date: 14 Apr 2005

Money Funds or Markets? Valuing Intermediary Services

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Abstract

Recent market developments, such as on-line trading of Treasury securities and the reduction of the minimum Treasury bill denomination to $1,000, facilitate creation of a viable alternative to U.S. Treasury money funds for investors. Comparison of a direct investment in Treasury bills to U.S. Treasury money funds shows that money fund intermediary services such as check writing, telephone exchange privileges, payroll and automatic transfers, retirement plans, and minimum initial and subsequent purchases are worth an estimated 43 basis points per year, and investors pay an additional 11 basis points for active portfolio management. An analysis of fund net cash flows shows evidence consistent with arbitrage activity between money funds and the direct investment in Treasury bills, especially for investors with few ties to the money fund manager.