Nearly half U.S. money funds earn no returns

By Richard Leong

NEW YORK (Reuters) - Historic low rates on U.S. Treasury bill rates hammered the $3.7 trillion (2.4 trillion pounds) money market fund industry with nearly half of the funds currently earning nothing, according to fund tracker Lipper.

A money market fund is expected to secure an income each day like a bank saving account, but low U.S. Treasury debt rates, a result of the current financial crisis, have diminished those expectations.

"At the very least, you hope to beat inflation, which they are not keeping up with. Their returns when you factor in inflation have been negative," said Jeff Tjornehoj, Lipper's senior research analyst in Denver.

The money fund industry, which is still recovering from the upheaval caused by the collapse of Lehman Brothers in mid-September, is poised for its fourth worst year in the past three decades, Tjornehoj said. "2009 could shape up to be a terrible year," he added.

Based on preliminary data, 838 or 46 percent of the 1,810 classes of money market funds Lipper tracks earned no return on Tuesday when benchmark three-month T-bill rates slipping into negative territory to their lowest level since the early 1940s. This compares with 112 classes that posted zero return on Monday, according to Lipper.

In September, Reserve Primary Fund, which had been one of the oldest U.S. money funds, saw its net asset value fall below $1.00 a share amid losses on issues by now-defunct Lehman Brothers. The news unleashed a flood of withdrawals from money funds, causing further disruption of the credit markets and leaving some money funds earning nearly nothing.

In response to industry turmoil, the Treasury Department created a program to support the value of money market funds, in which fund operators pay a premium to insure their shares. The program is due to expire on April 30, 2009.

LOW T-BILL RATES