Money Market Funds & Treasury Securities

What Are Money Market Funds?

A money market fund is a type of mutual fund that invests in short-term, high-quality debt instruments such as Treasury bills, commercial paper, certificates of deposit, and repurchase agreements. Money market funds are designed to maintain a stable net asset value (NAV) of $1 per share while providing investors with a modest yield that typically tracks short-term interest rates. They are regulated under Rule 2a-7 of the Investment Company Act of 1940, which imposes strict requirements on credit quality, maturity, liquidity, and diversification.

Money market funds should not be confused with money market accounts, which are deposit accounts offered by banks and credit unions that are insured by the FDIC or NCUA. Money market funds are investment products and are not federally insured, although they are considered among the lowest-risk investment options available. The distinction matters because investors sometimes assume that the word "money market" implies government insurance when it does not.

These funds serve a critical role in personal finance as a place to park cash that you want to keep safe and accessible while still earning a return. They are commonly used for emergency funds, short-term savings goals, and as a temporary holding place for money between investments. During periods of higher interest rates, money market fund yields can become quite competitive, sometimes exceeding the rates offered by savings accounts.

Types of Money Market Funds

Money market funds are categorized based on the types of securities they invest in. Each type carries a slightly different risk and tax profile, so understanding the distinctions helps you select the right fund for your situation.

Fund Type	Invests In	Risk Level	Tax Treatment	Best For
Government Money Market	U.S. Treasuries, agency debt, repos	Lowest	Federal tax; state tax exempt on Treasury portion	Maximum safety, institutional investors
Prime Money Market	Commercial paper, CDs, bank notes, repos	Low (slightly higher)	Fully taxable at federal and state levels	Higher yield seekers willing to accept minimal extra risk
Municipal (Tax-Exempt) Money Market	Short-term municipal securities	Low	Exempt from federal tax; may be state exempt	High-income investors in high-tax states

Government money market funds are required to invest at least 99.5% of their assets in government securities, cash, or repos collateralized by government securities. Because of their extremely conservative holdings, they are exempt from the liquidity fee and redemption gate provisions that can apply to prime and municipal funds. This makes them the most popular choice for both retail and institutional investors who prioritize capital preservation and unrestricted access to their money.

Prime money market funds invest in a broader range of short-term debt instruments including corporate commercial paper and bank certificates of deposit. They typically offer slightly higher yields than government funds because they take on marginally more credit risk. However, following SEC reforms, retail prime funds and institutional prime funds may be subject to liquidity fees during periods of stress if weekly liquid assets fall below required thresholds.

Municipal money market funds invest in short-term obligations issued by state and local governments. The income from these funds is generally exempt from federal income tax, and if the fund invests in securities from your home state, it may also be exempt from state income tax. For investors in high tax brackets, the after-tax yield from a municipal money market fund can exceed that of a taxable money market fund, even though the stated yield is lower.

How Money Market Funds Work

When you invest in a money market fund, you are purchasing shares that represent a proportional ownership of the fund's portfolio of short-term debt instruments. The fund manager selects and manages these holdings to maintain the stable $1 NAV while maximizing yield within the constraints of Rule 2a-7.

The yield on a money market fund fluctuates daily based on the interest rates in the short-term debt market. When the Federal Reserve raises its federal funds rate, money market fund yields tend to rise relatively quickly because the underlying securities mature and are replaced with new securities at higher rates. Conversely, when the Fed cuts rates, yields decline. This makes money market funds responsive to the interest rate environment.

Most money market funds calculate dividends daily and distribute them monthly. You can typically reinvest dividends automatically, which compounds your returns over time. Accessing your money is straightforward: most funds allow you to write checks against your balance, transfer money electronically, or redeem shares for next-day settlement. Some brokerages even allow same-day access for money market fund balances.

Expense ratios for money market funds typically range from 0.10% to 0.50% annually, though some brokerages offer money market funds with no expense ratio as a competitive feature to attract client assets. The net yield you receive is always after the expense ratio has been deducted, so comparing net yields across funds is more useful than comparing gross yields.

Treasury Securities Overview

U.S. Treasury securities are debt obligations issued by the United States Department of the Treasury to finance government operations. They are backed by the full faith and credit of the U.S. government, making them the benchmark for risk-free investments in the global financial system. Treasuries come in several forms, each with different maturities, structures, and purposes.

Security Type	Maturity	Interest Payment	Minimum Purchase	Key Feature
Treasury Bills (T-Bills)	4 to 52 weeks	Sold at discount; no coupon	$100	Short-term; most liquid
Treasury Notes (T-Notes)	2 to 10 years	Semiannual fixed coupon	$100	Medium-term; benchmark for mortgages
Treasury Bonds (T-Bonds)	20 to 30 years	Semiannual fixed coupon	$100	Long-term; highest interest rate risk
TIPS	5, 10, or 30 years	Semiannual; principal adjusts with CPI	$100	Inflation protection
Series I Bonds (I-Bonds)	30 years (1-year minimum hold)	Fixed rate + inflation rate; compounds semiannually	$25 (electronic)	Inflation protection; tax-deferred

Treasury Bills are the shortest-term Treasury securities. They do not pay periodic interest. Instead, they are sold at a discount to their face value, and you receive the full face value at maturity. The difference between the purchase price and the face value represents your interest income. T-Bills are extremely liquid and are commonly used as a cash equivalent in investment portfolios.

Treasury Notes pay a fixed coupon rate semiannually and return the face value at maturity. The 10-year Treasury note is one of the most closely watched benchmarks in financial markets because its yield serves as a reference rate for mortgage rates, corporate bonds, and many other financial instruments. T-Notes offer a balance between yield and interest rate risk for intermediate-term investors.

Treasury Bonds are the longest-maturity Treasuries, with terms of 20 or 30 years. They pay the highest coupon rates among Treasuries but also carry the most interest rate risk. When interest rates rise, long-term bond prices fall more sharply than short-term bond prices. Treasury bonds are typically held by pension funds, insurers, and investors seeking long-term income streams.

Treasury Inflation-Protected Securities (TIPS) have a unique structure: the principal value adjusts based on changes in the Consumer Price Index (CPI). When inflation rises, the principal increases, and because interest payments are calculated as a percentage of the adjusted principal, your interest payments rise as well. At maturity, you receive the greater of the original or the adjusted principal. TIPS provide a guaranteed real rate of return above inflation, making them valuable for protecting purchasing power.

Series I Bonds are savings bonds that combine a fixed rate of return with an inflation adjustment that changes every six months. They can be purchased electronically through TreasuryDirect in amounts as small as $25, with an annual purchase limit of $10,000 per person in electronic form (plus up to $5,000 in paper form using a tax refund). I-Bonds must be held for at least one year, and if redeemed before five years, you forfeit the last three months of interest. They are popular among individual investors because of their inflation protection, tax-deferral features, and accessibility.

How to Buy Treasury Securities

There are two primary methods for purchasing Treasury securities, each with its own advantages.

TreasuryDirect

TreasuryDirect (treasurydirect.gov) is the U.S. government's online platform for buying, managing, and redeeming Treasury securities directly. There are no fees or commissions, and you can purchase T-Bills, T-Notes, T-Bonds, TIPS, and I-Bonds directly from the Treasury. This is the only way to purchase Series I Bonds electronically. TreasuryDirect accounts are linked to your bank account for funding purchases and receiving redemption proceeds.

The main advantage of TreasuryDirect is cost: there are no intermediary fees. The drawback is that securities held in TreasuryDirect cannot be easily traded on the secondary market. If you want to sell a T-Note before maturity, you would need to transfer it to a brokerage account first, which can take several days.

Brokerage Accounts

Most major brokerages, including Fidelity, Schwab, and Vanguard, allow you to purchase Treasury securities at auction or on the secondary market. Buying through a brokerage gives you the flexibility to sell your Treasuries before maturity if needed, and you can hold them alongside your other investments in a single account. Many brokerages charge no commission for Treasury purchases at auction, though there may be a small markup for secondary market purchases.

For investors who want liquidity and convenience, a brokerage account is generally the better option. For those who plan to hold to maturity and want to minimize costs, TreasuryDirect works well. Many investors use both: TreasuryDirect for I-Bonds (which are only available there) and a brokerage for other Treasuries.

Money Market Funds vs. High-Yield Savings vs. CDs

Investors seeking safe, liquid places to park cash often compare money market funds with high-yield savings accounts and certificates of deposit. Each has distinct characteristics that make it better suited for different situations.

Feature	Money Market Funds	High-Yield Savings Accounts	Certificates of Deposit (CDs)
FDIC/NCUA Insured	No (SIPC coverage applies)	Yes, up to $250,000	Yes, up to $250,000
Liquidity	High (same-day or next-day)	High (instant transfers)	Low (early withdrawal penalty)
Yield	Competitive; tracks fed funds rate	Competitive; varies by bank	Often higher; locked at purchase
Rate Behavior	Adjusts quickly with rate changes	Adjusts, but banks may lag	Fixed for the term
Minimum Investment	Varies ($1 to $3,000+)	Often $0	Varies ($500 to $1,000+)
Tax Considerations	May have state tax exemption on Treasury holdings	Fully taxable	Fully taxable
Best For	Brokerage cash management, larger balances	Emergency funds, everyday savings	Locking in rates, known future expenses

The choice among these options depends on your priorities. If federal insurance is important to you and you want simple, instant access, a high-yield savings account is hard to beat. If you are managing cash within a brokerage account and want yields that respond quickly to rate changes, a government money market fund is an excellent choice. If you know you will not need the money for a specific period and want to lock in a rate, CDs provide certainty.

Many investors use a combination of all three. For example, you might keep your emergency fund in a high-yield savings account for safety and instant access, use a money market fund as a sweep account in your brokerage for investing cash, and purchase CDs or T-Bills to lock in attractive rates when they are available.

When to Use Money Market Funds

Money market funds are most useful in specific financial situations where safety, liquidity, and modest yield are all priorities.

• Brokerage cash management: When you sell an investment and have not yet decided where to reinvest the proceeds, a money market fund keeps your cash productive while you evaluate opportunities. Many brokerages automatically sweep uninvested cash into a money market fund.
• Short-term savings goals: If you are saving for a down payment, a major purchase, or tuition that is due within the next one to two years, a money market fund provides safety and a better return than a standard checking account.
• Rising rate environments: When interest rates are increasing, money market fund yields adjust upward relatively quickly because their underlying holdings mature and are replaced with higher-yielding securities. This makes them more responsive than savings accounts, where banks may delay passing on rate increases.
• Tax-sensitive situations: Municipal money market funds can provide tax-exempt income that is particularly valuable for investors in high tax brackets. Government money market funds can offer partial state tax exemption on the portion of income derived from Treasuries.
• Waiting for investment opportunities: During periods of market uncertainty, keeping a portion of your portfolio in a money market fund gives you ready cash to deploy when you identify attractive entry points, without sacrificing all yield while you wait.