What are U.S. Government Money Funds
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U.S. government money market funds invest only in short-term Treasury obligations and short-term debts of U.S. government agencies. These include:
Government National Mortgage Association ("Ginnie Mae") pass-through securities
Federal Home Loan Mortgage Corporation ("Freddie Mac") pass-through securities
Federal National Mortgage Association ("Fannie Mae") securities
Federal Home Loan Bank (FHLB) System
Farm Credit Banks
Student Loan Marketing Association ("Sallie Mae")
Small Business Association (SBA) participation certificates
Department of Housing and Urban Development (HUD) U.S. Government Guaranteed Notes
Financing Corporation obligations
Private Export Funding Corporation secured notes
Discount notes -- IOUs that don't pay a coupon, so they are sold at a discount but redeemed at face value, much like zero coupon bonds. These are often issued by federal agencies.
Congress created these agencies through various laws, to provide funds for various parts of the economy. Most of the above are privately owned and the U.S. government does not have a legal, explicit obligation to pay the interest, as they do for all securities and savings bonds issued directly by the U.S. Treasury Department. However, it's widely understood that the U.S. government has a "moral" (or: POLITICAL) obligation to uphold these securities.
Treasury Money Markets Are Almost as Safe as Treasury Bonds
Nobody knows what would happen if most of these agencies would have massive economic problems preventing them from making the promised interest payments. It hasn't happened yet, and we should hope it never does, since that would only happen in the event of other widespread economic problems.
NOTE: the above paragraph was written in 2007 before the financial crisis of 2008. Now we know that the United States federal government will bail out all those agencies.
Consequently, U.S. Government money markets are considered highly safe investments, safer than general purpose funds.
However, the dividends paid to you on this type of money fund is taxable. If you want get out of paying taxes, check out tax-exempt money market funds
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