What Are Money Market Operations?
Institutions execute money market operations to receive short-term financing from investors. In exchange, investors earn interest payments, while preserving liquidity. Be advised that money market operations carry distinct risks.
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Identification
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Money market instruments are debt securities that mature in less than one year. Because of their short maturities, money market investments may be referred to as cash equivalents. These securities include treasury bills, commercial paper, certificates of deposit and short-term mortgages.
Features
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Through brokers, government officials and corporations first issue money market securities to investors in the primary market. From there, savers trade these investments between themselves within the secondary market. Money market investments may be bought directly from the issuer, as is the case at TreasuryDirect.gov.
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Considerations
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Money market interest rates closely track Federal Reserve monetary policy and its federal funds rate. The Fed lowers the federal funds rate in a recession to improve the economy, while it targets higher interest rates to slow down an overheated economy and to combat inflation.
Warning
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Money market operations feature opportunity costs risks, which identify foregone profits. For investors, longer-dated corporate bonds pay more interest than money market securities.
Strategy
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Diversify assets to manage risks. A portfolio that includes money market securities, along with stocks, stabilizes cash reserves, while providing for long-term growth.
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References
Resources
- Photo Credit dollar bill image by jimcox40 from Fotolia.com
