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The Reserve Primary Fund suspended redemptions and its net asset value fell below $1 a share, eroding confidence in money- market funds, which invest in commercial paper. That could drive up financing costs for companies, said Ajay Rajadhyaksha, head of fixed income strategy at Barclays Capital Inc. in New York. Companies rely on access to the commercial paper market to finance day-to-day expenses such as payroll and rent.
``That unfortunately can spiral in the sense that it makes it more difficult for all companies to raise short-term money,'' Rajadhyaksha said.
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"This is a panic situation," said Charles Comiskey, head of U.S. government bond trading in New York at HSBC Securities USA Inc., a primary dealer. "This is a scary time, because it seems to me that with one money fund going below par, people are getting nervous."
The markets were gripped with fear as redemption worries skyrocketed after Reserve Primary, a $65 billion money market fund, saw its net asset value fall below $1 per share and had to suspend redemptions for one week. The fact that such ultra-safe short-term asset could wobble caused investors to demand the safest assets -- Treasury bills.
Reserve Primary is only the second fund in history to see its NAV drop below $1 a share. The drop came as the fund wrote down its 1.2% exposure to Lehman Brothers and delayed redemptions for as much as seven days.
