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:

Treasury bills

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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