Money market instruments are considered among the safest short-term investments available, as they are primarily issued by highly creditworthy borrowers, like governments and large financial institutions.
2. Liquidity
Money market instruments offer a high degree of liquidity, meaning they can be easily bought and sold at short notice in the secondary market, providing investors with ready access to their funds when needed.
3. Short-term maturity
Money market instruments have short maturities, typically less than one year, which reduces the risk and increases predictability in terms of cash flow and interest payments.
4. Fixed income
Most money market instruments pay a fixed rate of interest or return over their term, allowing investors to accurately predict their income from these investments. This predictability is highly valued in the management of short-term cash flow.
5. Regulation
Government bodies often regulate money market instruments, providing additional protection for investors and ensuring compliance with standards.
6. Active secondary market
There's an active secondary market for many money market instruments, especially Treasury securities in developed countries, which increases their liquidity and marketability.
7. Discount or Par Value
Some money market instruments are issued at a discount, trading below par value, while others are issued at par, meaning they trade at their face value.
8. Central bank influence
Central banks influence the money markets by conducting monetary policy operations, which can impact the pricing and yields of money market instruments.
9. Inflation risk
While they are generally less susceptible to inflation risk due to their short maturities, some money market instruments may still experience reduced value if inflation exceeds their interest rate.
10. Yield Curve
The interaction of supply, demand, and market expectations lead to the formation of the yield curve, which influences the interest rates and yields on different money market instruments.