As a financial analyst, I often get asked about money market funds that invest heavily in commercial paper – are they worth the additional risk for the extra yield? Having analyzed these instruments for years, I’ll explain exactly how they work, when they make sense, and what investors should watch for.
Table of Contents
What Makes Commercial Paper Funds Different?
Commercial paper money market funds (CP MMMFs) are a subset of prime money market funds that focus primarily on short-term corporate debt rather than government securities. Here’s what sets them apart:
| Characteristic | Government MMMF | Commercial Paper MMMF |
|---|---|---|
| Primary Holdings | Treasury bills, agency debt | Corporate promissory notes |
| Average Maturity | 30-60 days | 30-90 days |
| Credit Risk | Virtually none | Low, but present |
| Typical Yield Spread | Lower by 0.25%-0.75% | Higher |
| Regulation | SEC Rule 2a-7 | SEC Rule 2a-7 with liquidity requirements |
How Commercial Paper Works
Corporations issue these unsecured promissory notes to meet short-term funding needs. The debt:
- Matures in 1-270 days (typically under 90 days)
- Pays a fixed interest rate
- Is rated by agencies (A-1/P-1 for top tier)
- Is exempt from SEC registration
Top Commercial Paper Money Market Funds
Here are three major options with their current details (June 2024):
| Fund Name | Ticker | 7-Day Yield | Expense Ratio | Min. Investment |
|---|---|---|---|---|
| JPMorgan Prime Money Market | VPMXX | 5.12% | 0.40% | $1,000 |
| Fidelity Money Market Fund | SPRXX | 5.05% | 0.42% | $0 |
| Federated Hermes Prime Cash | PCOXX | 5.18% | 0.36% | $1,000 |
Yields reflect current Fed funds rate environment
The Risk/Reward Calculus
Advantages
- Higher Yield Potential
Currently paying 5%+ vs 4.25-4.75% for government funds - Diversification Benefit
Adds corporate exposure to cash holdings - Still Highly Liquid
Next-day redemption in most cases
Risks to Monitor
- Credit Risk Concentrations
Some funds have heavy exposure to financial sector paper - Liquidity Gates
SEC rules allow temporary suspensions during stress - Interest Rate Sensitivity
Longer average maturities mean more rate impact
Historical Stress Test: 2008 vs. 2020
2008 Financial Crisis
- Reserve Primary Fund “broke the buck” (NAV fell below $1)
- Led to SEC reforms requiring weekly liquid assets
2020 COVID Shock
- Heavy redemptions occurred
- Fed stepped in with Money Market Mutual Fund Liquidity Facility
- No funds broke the buck
Who Should Invest?
These funds work best for:
- Corporations managing treasury cash
- Sophisticated investors chasing yield
- Those needing slightly higher returns on emergency funds
Better Alternatives When:
- Absolute capital preservation is priority (use government MMMFs)
- You may need funds during market turmoil
- You’re in a high tax bracket (consider munis instead)
Due Diligence Checklist
Before investing, always:
- Review the fund’s holdings breakdown
- Check credit quality (percentage in A-1/P-1 paper)
- Understand liquidity provisions
- Compare after-fee yields
- Read the prospectus risk disclosures
The Verdict
Commercial paper money market funds offer a reasonable compromise between risk and return for cash allocations. While not as safe as pure government funds, the additional yield can be meaningful in today’s rate environment – especially for larger balances where 0.50% extra equals real money.
