What Is Breaking the Buck?
Breaking the buck happens when a money market fund’s net asset value (NAV) drops below $1. This can occur if the fund’s investment income doesn’t cover its expenses or losses. It often happens when interest rates are very low, or if the fund takes on excessive risk.
Breaking the buck is bad for investors. Shares intended to maintain a $1 value drop below that, risking part of the invested principal. Money market funds have largely earned their reputation for providing liquidity and safety, however, and a fund’s NAV rarely falls below $1.
Key Takeaways
- Breaking the buck occurs when a money market fund’s net asset value falls below $1, indicating possible investment losses or high operating costs.
- Money market funds are typically seen as low-risk investments, offering returns higher than regular savings accounts but are not FDIC-insured.
- The phenomenon of breaking the buck is rare and typically signals economic distress, as money market funds are considered nearly risk-free.
- Rule 2a-7 legislation imposed after the 2008 financial crisis increased safety by limiting the maturity and credit quality of money market fund investments.
- The first major instance of breaking the buck happened in 1994, with the Community Bankers U.S. Government Money Market Fund liquidating at 96 cents.
How Money Market Funds Break the Buck
The NAV of a money market fund normally stays constant at $1. This is facilitated by market regulations. Regulations let funds value investments at amortized cost, not market value, keeping the NAV at $1. This stability makes them an alternative to checking and savings accounts. So if the fund has two million shares, their combined value would be $2 million. By using an amortized pricing structure, the fund can manage its own activities and provide for redemptions.
When the value of the fund goes below $1, however, it’s said to break the buck. Even though this is a rare occurrence, it can happen. Breaking the buck generally signals economic distress because money market funds are considered to be nearly risk-free. Investors use money market funds alongside checking accounts for additional liquid savings. These funds are like open-end mutual funds that invest in short-term debt securities such as U.S. Treasury bills and commercial paper. They offer higher returns than standard checking and savings accounts but aren’t insured by the Federal Deposit Insurance Corporation (FDIC).
Most money market funds have check-writing capabilities and also allow money to be easily transferred to a bank account. Money market funds pay regular interest that can be reinvested in the fund.
Important
Breaking the buck normally occurs when interest rates drop to very low levels, or the fund uses leverage to create capital risk.
The Evolution and Key Events in Money Market Fund History
Money market funds were introduced in the 1970s to highlight mutual fund benefits, significantly increasing asset flows and demand. The first money market mutual fund was named the Reserve Fund and established the standard $1 NAV.
The first case of a money market fund breaking the buck occurred in 1994, when Community Bankers U.S. Government Money Market Fund was liquidated at 96 cents because of large losses in derivatives.
In 2008, the Reserve Fund was affected by the bankruptcy of Lehman Brothers and the subsequent financial crisis. The Reserve Fund’s price fell below $1 due to assets held with Lehman Brothers. Investors fled the fund and caused panic for money market mutual funds in general.
After the 2008 crisis, the government introduced Rule 2a-7 to make money market funds safer with strict new provisions. Money market funds can no longer have an average dollar-weighted portfolio maturity exceeding 60 days. They also now have limitations on asset investments. Money market funds must restrict their holdings to investments that have more conservative maturities as well as credit ratings.
Investing in Money Market Funds: Tips and Key Players
Vanguard is a leader in money market fund products. It offers two taxable money market funds and three municipal funds, all priced at $1. Its best-performing money market fund is the Vanguard Federal Money Market Fund (VMFXX). It had a year-to-date return of 0.89% as of March 31, 2026. The fund has earned a cumulative 468.40% since its inception in July 1981.
The fund has roughly 139 holdings with an average maturity of 60 days or less. Its net assets were $214 billion, with a management expense ratio of 0.11%. The Vanguard Federal Money Market Fund requires a minimum investment of $3,000. According to its fund profile, it’s the most conservative of the Vanguard funds.
Why Does Breaking the Buck Happen?
Typically, breaking the buck happens because the money market fund’s investment income fails to cover its operating costs or investment losses. But it can also be a response to a broader economic issue, such as a unusually low interest rates amid an economic recession.
Does Breaking the Buck Happen Often?
No, breaking the buck is not a frequent occurrence, with money market funds generally seen as some of the safest, most reliable investments available.
What Are Vanguard’s Money Market Mutual Funds?
There are two taxable funds — the Federal Money Market Fund (VMFXX) and the Treasury Money Market Fund (VUSXX). There are also three municipal funds — California Municipal Money Market Fund (VCTXX), Municipal Money Market Fund (VMSXX), and New York Municipal Money Market Fund (VYFXX).
The Bottom Line
It’s critically important for money market funds to maintain a stable net asset value (NAV) of $1 and it’s rare that money market funds will break the buck. It’s typically an indication of economic distress or failure of investment income to cover expenses and losses when it does happen. Historical examples include the 1994 Community Bankers U.S. Government Money Market Fund liquidation and the 2008 Reserve Fund crisis to underline the seriousness of the event.
Legislative changes like Rule 2a-7 demonstrate the increased safety of money market funds. Investors shouldn’t shy away from them, given their liquidity and higher return potential compared to checking or savings accounts. But exercise due diligence when you’re choosing a fund, keeping in mind the potential risk and current economic conditions.